Foreign direct investment may benefit India as a whole, but could be negative for investors in local retail companies, argues Sunil Asnani, portfolio manager at US fund house Matthews Asia.
The Indian economy has not yet benefited as much from FDI as many have hoped, he says, but this has helped to sustain valuations of listed consumer goods suppliers.
“There has always been a belief that foreign direct investment, for example in the retail segment, is good for the country, as it helps India’s external account,” he says. “FDI is viewed as helping address food inflationary pressure, as foreign capital will be spent on building the logistics network, from farms to customers via improving retail delivery efficiency.
However, the inevitable “tug of war” between multi-brand retailing, such as international supermarkets, and established consumer brands may well erode the latter group's pricing power, says Asnani. “Retailers would ask for bigger price discounts from [local] suppliers, threatening to displace them with other suppliers.”
While there have been attempts by New Delhi to boost FDI, foreign groups have met challenges from state governments and policy implementation issues.
A move in 2012 to allow international supermarket groups to invest up to 51% in retail operations has not really borne fruit, amid strong opposition from local retailers and harsh conditions imposed on FDI. The decision by Walmart to pull out of its joint venture with Bharti last year highlighted the difficulties involved with such investment.
One upshot of all this is that trying to time the market for the ideal point of entry is not advisable, says Asnani. Rather than trying to speculate on when the FDI-driven gross domestic product growth story will play out in India, he notes, it is more realistic to look for companies that command pricing power over their competitors amid different economic cycles.
With asset under management of $25 billion, San Francisco-based Matthews Asia has $2 billion invested in India securities across both dedicated India funds and Asia-wide strategies.
The firm launched a Luxembourg-domiciled India fund in 2011 to sell to investors outside the US. It currently has AUM of $10 million, with two institutional investors invested into the fund from Hungary and Thailand, and is looking to boost this figure.