‘Invest in companies with real assets’

At a time when inflation is threatening to rise more in the medium term, owning 'real assets' whose value and returns are directly linked to, or in some cases the root cause of rising prices is a strategy worth serious consideration, feels Amit Lodha, fund manager at Fidelity. Even beyond any inflationary phase that countries across the world might go through, the capital expenditure in developing nations will continue, he told DNA, suggesting that real assets such as commodities will be very much in demand. Excerpts from the interview:

How does the potential in emerging markets compare with the potential you see in real assets?
The growth in emerging markets is expected to continue, but there is a lot of potential in the real asset space. If you look at China, over the last few years the equity market has doubled in size but mining companies have gone up eight-fold. The growth that is taking place in emerging markets would be reflected in companies that are present globally and deal with commodities and other irreplaceable real assets. These developed market companies can be an effective play on the emerging markets. 

How far do you expect inflation to affect the demand for real assets?
In India, the inflation in food prices is on account of a bad monsoon. Emerging markets are likely to reflect inflation sooner but the developed countries are also going to be affected on account of the printing of money that is taking place in them. Gold and other commodities maintain their pricing power as inflation takes hold. We believe that it makes sense to invest in a company that has these assets, which cannot be replaced, such as a gold mine or an oil field. The asset need not be a commodity per se so long as it is not replaceable. It could also be an interesting technology, such as one for recycling. Inflation would be a problem over the next 3-5 years. Financial assets don’t do as well in these scenarios as real ones. Land can’t be replaced, and so it has historically done well as has gold.

Do you see inflation resulting in any immediate tightening of liquidity?
I do not belong to the camp of people who believe hyperinflation is around the corner. Policy action would be a reflection on how the economy is expected to do.  If the outlook is positive, then higher interest rates would likely follow. That said, the US Fed is unlikely to raise rates until unemployment falls below the 10% mark.

Realty is not being looked at very favourably in India. How would the process of identifying Indian real estate opportunities differ from their global counterparts?
Realty companies tend to be localised, because one needs to know about the area one invests in. Those who had invested in Gurgaon and Bangalore have benefited from the boom in the IT and BPO sectors in those areas. Indian companies would be differently placed compared with their global counterparts. A lot of the big companies internationally work on a lease rental model by specialising in mall or office spaces, which generate a sort of annuity income. The model would be different in India where the spotlight is on realty developers. There is an interesting opportunity in real estate but one has to find assets that are undervalued. One needs to buy into companies that are able to buy land cheap and have the vision to spot potential.

How important a criterion is dividend yield when it comes to picking a stock in an economy like India?
The fact that India is a growth economy is not disputed but dividends are still an important means of gains through stock ownership. One-third of income from stocks comes through dividends, while the remaining is in the form of capital appreciation. Investment in riskier avenues, where the company is still in the initial growth phase, is where capital appreciation is seen. Although there would be a lot of opportunity for growth companies in India, dividend yield would remain an important criterion for investment.

How big an increase could India see in its use of commodities?
There would be a lot of demand for a range of commodities in a developing economy like India. Our country uses a tenth of the steel that China uses and the scale for expansion is enormous. The Kolkata Metro is around 20 kms while London is 200 kms. The road network as a percentage of area is not very large. All of this points towards a large commodity consumption.

Which commodities are you positive on?
Gold, platinum and coking coal would see a lot of demand. Oil, copper and aluminium will be consumed in large quantities. Uranium is also something that India will likely demand more of.