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Lead-Lag Live
Chris Getter of Simplify, and Anupam Ghose on India's Economic Evolution, Investment Strategies, and Market Opportunities
What if investing in India could unlock unprecedented growth opportunities for your portfolio? Join us as we unravel the dynamic transformation of India's entrepreneurial and economic landscape, highlighting insights from Chris Getter of Simplify, and Anupam Ghose from System 2 Advisors. With first-hand accounts of navigating the complexities of India's evolving market, this episode offers a front-row seat to understanding India's mercantilist roots, its challenges during the 1980s, and the remarkable shift toward a thriving global economy.
Embark on a historical journey from India's socialist beginnings under Jawaharlal Nehru to the groundbreaking economic liberalization of the 1990s. Witness how a balance of payments crisis became a catalyst for foreign investment and growth, particularly in the IT sector. We also contrast India's rise with its BRICS counterparts, examining its burgeoning presence in global bond indices and the expanding corporate bond market. Gain insight into the factors that make India a standout economy, with a keen focus on its unique consumption-driven structure.
Our discussion then shifts gears to investment strategies in India's market, spotlighting the India Fund I-O-P-P managed by Simplify. Learn how Anupam and his team navigate the intricacies of Indian ETFs, employing a strategic approach to identify high-growth opportunities. We'll explore regulatory hurdles, democratic challenges, and compare India’s economic structure with China’s. This comprehensive analysis provides a nuanced view of emerging market investments, offering strategies to capitalize on India's promising growth potential.
DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Simplify Management and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities
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India has been a mercantilist economy for the last 5,000 years. You know India has been. You know certain communities from India have been. You know, migrating to other places If you go and look at you know East Africa, for example, and a lot of other places Not unlike. You know Chinese who immigrated to the Philippines, or you know Malaysia etc. Dominate this economy. Indians dominate a lot of the African economies and, no surprise, here in the United States, you know, you've got, you know almost virtually every Motel and hotel owner from one community in India. These are, you know, entrepreneurs and business people who migrated here and essentially established themselves. So the spirit has always been there. You know it's really over the last 25, 30 years that conglomerates in India have loosened the shackles and built globally leading businesses.
Speaker 2:My name is Michael Guy, publisher of the Lead Lag Report. This conversation is sponsored by Simplify. I want to have Chris and Anupam introduce themselves. So, Chris, talk about who you are, what's your background, what have you done throughout your career and what are you doing currently?
Speaker 3:Good morning everyone and thank you, michael for having me join. It's a pleasure to be here. I've spent my entire career in emerging markets, primarily on the fixed income side, going all the way back to the mid-1990s when emerging markets started to establish itself as an asset class. These countries emerging from the Brady Plan restructuring their debt and I've seen them progress. I've seen new avenues for expressing enthusiasm on EM develop, whether that's going beyond just the sovereign or currency space, local currency and corporates equities, and I am a portfolio manager and emerging market strategist here at Simplify-based, beautiful Las Vegas.
Speaker 2:Same to you, Anupam. Go ahead. Thanks, Michael.
Speaker 1:Thanks, chris. My name is Anupam Ghosh and I'm the founder and CIO at System 2 Advisors. I'm obviously of Indian origin, born there, brought up there, went to college there In 1988, I was convinced that good things were going to happen in India. I tried to build a business there. Failed and failed miserably and came to grad school here in 1990. And 35 years plus, here I am. I founded System2 about 13 years back 13 years back and today we run approximately 800 million assets primarily in India health funds In India, not only portfolios, we do have other portfolios that we manage.
Speaker 1:So the bulk of the people that we have are in India. We have four offices in India and about 74 people as we speak. And really my first experience with India Asset Management happened between my early life, between my stints at Goldman and Credit Suisse. I helped in 2005,. I helped start the process to launch one of the first ETFs on India in the US, the PowerShares India product. You know, in 2005, I was looking for what next to do after Goldman and at that time India was kind of stirring. You could not open the journal, not a good article on India. But India was largely an institutional market because it's an ID market, the values track, et cetera.
Speaker 1:So, you know, I thought, too, how would an ETF in India work? How would an ETF in India work? And I have known Bruce Bond now the innovator shares but founder of PowerShares from his days at Nuveen, and the two of us collaborated in helping Bruce to launch, you know, one of the first ETFs in India. So, again in 2016, we pivoted back to high alpha markets, like India, and, like I said, today the bulk assets that we manage are in the hedge fund format or the private fund format. In India, we were fortunate that the founders of Simplify bought, a year and a half back, great bunch of guys who said let's do this thing.
Speaker 2:So there's a lot of things I want to ask on each of your careers. First, before we get into the investment case for India and you know perhaps China as well. You mentioned 98, anupam. You tried to start a business, failed. I am curious how entrepreneurism has maybe evolved in India over the last several decades. I always go back to the success of an entrepreneur as a function of not just the micro effort but obviously the macro environment. Maybe the failure was a combination of the two right, or maybe with more macro or more micro. But talk me through sort of how India has evolved from that standpoint.
Speaker 1:Sure Michael. First I'll start by telling you it was 1980.
Speaker 2:Oh, 1980,. Okay, yeah, first I'll start by telling you it was 1980. Oh, that data game.
Speaker 1:Yeah, where was it going If you look at India as a country and as the government, etc, etc. In the 60s and 70s there was a 60s, especially with the first, you know, prime Minister of India, jovan Al Nehru there was a significant lurch to the left, lurch to the left, and it was one of the founders of the non-aligned movement, which is basically, you know that euphemism for left-leaning Russia, you know, or USSR, you know, connected countries, Egypt, etc, etc. Part of it is primarily because the United States, under Nixon and Kissinger, chose to ally with Pakistan and that automatically led to sort of India moving towards the other side. Now the government, you know, especially under Nehru, sort of adopted you know, the government, especially in Nehru, sort of adopted the socialist manifesto and essentially became a state-owned state. Now, all that was pretty good. All that was pretty good. The country was moving in a different direction until problems started. Problems have started and before I talk about my entrepreneurial effort, which was brief but intense, it was 20 years old In 1991, there was a major balance of payments issue where literally the foreign exchange reserves of the country were down to a couple months of exports or whatever, and the government went into a little bit of a panic and that's what started.
Speaker 1:The liberalization of the economy Also started the stock exchange in India and progressively different sectors were opened up here to foreign institutions. Until 1991, you know, no foreigner could own either bonds or stocks in India. Amazing, it's where he started from and different regimes came in, and I point to sort of the Modi government and sort of the last you know 10, 12 years now, where it is tempting to significantly loosen. You know restrictions make life easy for entrepreneurs and you know, michael, you've seen this. You know, in sectors where India market leader. You know IT-enabled business service, et cetera, where you've got, you know these companies didn't exist until the late 1990s. You know it's really the Y2K problem here in the United States, globally that gave rise to the need for people who could code and read code. Today we've got multiple $100 billion-plus companies.
Speaker 1:If you were up early this morning watching the Australian Open major, major sponsor, infosys Technologies, To believe that 30 years back this company didn't exist. If you run, michael, if you're a marathoner, and you run the New York City Marathon, it is the TCS or the Toronto Consulting Service. What do you? Yeah, responsible marathoner. So there's been a coming of age in that there has been enablement from the government in lessening regulation, in making this easy, being well a foreign capital. You know the. I will point to a momentous event in july of last year when, for the first time, you know, indian sovereign bonds were included in global. You know global, global indices, global indices. I mean work had been going on for a while but it took a while, you know, for this to happen. So you know the merge went, you know, in one direction and you know once these, once sort of you know this steamroller starts, there's no going back and that's just right.
Speaker 2:Crazy. You mentioned your long career on the emerging market side. You probably remember very well, as I do, when BRICS were all the rage and you had a number of funds that were playing the Brazil, russia, india, china. You know combinations, so to speak. Then comes the GFC great financial crisis and suddenly BRICS are not mentioned anymore and there's no excitement. India has clearly pulled away right from a lot of the other emerging economies. I'm curious to hear your thoughts in the business for a while. Why is it that India has stood out against the other countries?
Speaker 3:Well, I think it's a couple of things. One is I'll never be the person that says this time is different or this country is different, but I do think there are some things which distinguish india. One is the sheer size of the population in the economy. I mean like, okay, brazil, brazil's about as large population-wise as the US, russia's massive landmass, a very important geopolitical player, those things are all great. But India just has that path to be relevant and they've been doing it quietly, largely because they haven't been as accessible to foreign investors. We can go and invest onshore in Brazil and do that to varying degrees, or it's been progressing in China.
Speaker 3:You can now get onshore but, as Anupam mentioned a moment ago, like India's bond markets just opened up, it's a pretty lengthy process to get access to go onshore. You have to fill out regulation, regulatory tests, you have to report to the authorities, and so it's been a little bit quieter, in part because it's, you know, a little bit more closed. But there's been a lot of tremendous stuff going on in the background, both with respect to the opening up, the entrepreneurialism and the dynamism of that economy. Up with the entrepreneurialism and the dynamism of that economy, and you know, lo and behold like fast forward to 2024, from 1996, uh, when I started in the business. And you know, you've got a. You know got 6,000 plus companies listed in India. That that's actually more than we have in the U S. Uh, you have a bond market which is accessible to foreign investors, has now been included in indices. You have a vibrant host of corporate bond issuers that are tapping international capital markets. It's just taken longer to recognize that dynamism India's case than it might have for the other BRICs.
Speaker 2:How much of that dynamism Anupam is priced in. How much of that dynamism Anupam is priced in Now? I will tell you that I never liked that term priced in because to me it's like well, risk is never priced in until it's too late. But I'm curious to hear kind of your thoughts on has a lot of the movement, a lot of the excitement in India's markets been discounted by at least the smart money?
Speaker 1:Michael, it's a great question and I do want to point out I was actually at Hornman when Jim O'Neill coined the term. It didn't have the S at that time.
Speaker 1:And it didn't have the S. At that time there was a young Indian analyst who used to work for Jim. He actually wrote the book. Jim gets all the credit for it. It's called Dreaming with the Bricks. Which is Dreaming with the Bricks? That's the actual paper, very, very short paper. And the reason why I mention that is today we have South Africa's bricks and we've included a bunch of other countries. India is the only investable country.
Speaker 1:You know, in that acronym which is far outlived but going back to sort of animism, et cetera, et cetera and the Indian entrepreneurial spirit, india has been a mercantilist economy for the last 5,000 years India has been. Certain communities from India have been migrating to other places. If you go and look at you know East Africa, for example, and a lot of other places not unlike. You know Chinese who immigrate to the Philippines, or you know Malaysia, etc. Dominate those economies. Indians dominate a lot of the African economies.
Speaker 1:And, no surprise, here in the United States, you know, you've got, you know almost virtually every motel and hotel owner from in the United States. You've got almost virtually every motel and hotel owner from one community in India. These are entrepreneurs and business people who migrated here and essentially established themselves. So the spirit has always been there. It's really over the last 25-30 years. Conglomerates in India have loosened the shackles and built, you know, globally leading market. You know businesses, you know whether that be in. You know vaccinations, you know whether that be in. You know sort of diamond cutting and polishing, whether that be in generic pharma. There's been a lot of growth in India, both export-oriented and domestic, because the DNA of the people is there.
Speaker 2:I think correlated to dynamism is demographics and, chris, I want to go to you on this, because it's well known that India's demographics are favorable, certainly younger on average than a lot of other countries, and when you're younger you're more malleable in terms of skill set, in terms of adapting to changing economy. Is it fair to say that, at least relative to China, that is sort of the biggest edge that India has.
Speaker 3:Well, I was going to say it's an advantage. Is it the biggest advantage? I'm not sure, but if there's one set of numbers that I would give people that points in the direction that you're heading, you look at the population pyramids today, 30 under 30 years old. 50 of india's population, half of india's population is younger than 30. Half of china's population is older than 40. India's population will not peak in raw numbers for another 40 years. China is already shrinking. So if you go back to like economic first principles, what is growth? It's population growth, times, productivity growth. Like that is a very serious and structural headwind for China. It doesn't mean the economy can't grow, but one of those very important terms like that leader cannot be full In the case of India still growing, still pretty robust, cannot be full in the case of india still growing, still pretty robust. Um, so I I think that that is one of the things that underpins like, why do we want to have an india fund?
Speaker 2:it's because that that that demographic reality feeds into a structural for the time being, structural growth use the word, uh, lever, which is the way I think think the Brits would refer to lever, and I want to Thank you for translating. Yeah, to make it clear, and I want to tie that into a little bit of a discussion around leverage. China obviously has a tremendous amount of leverage and debt and we've seen some interesting dynamics in terms of their yields as a result of how much the country has. How does India compare from that standpoint?
Speaker 1:It's significantly lower. I won't have the exact numbers for you, but Indians are typically, the more you see from us, very, very debt-averse, very, very debt-averse, very, very debt-averse. It's a capital-scarce country. Access to capital is low, hence not many people are as liberal as they could be. That is now changing as credit cards are coming in and sort of credit-led consumption is happening and typically the more Western sort of credit-led consumption happening and typically the more Western sort of phenomena essentially pouring into the future has come in in a meaningful way, but still a relatively small part of the population. If you look at the number of credit cards that are there, the number of credit cards that are there, the amount of auto loans, et cetera, et cetera, it is still very, very benign. It's not as levered.
Speaker 1:Common leverage on the other side is deficit financing etc. But only 4% of Indian debt is owned by non-Indians. The same comparison we always make with Japan, for example. As in Japan, as it is, no one really cares because all the data is Japanese-owned, not all. Most of it, well, quite different in the US and other places. So the leverage structure is not very relevant because of the lack of the access to capital and sort of aversion culturally, and I don't want to regale you with stories of how I'm a fresh off the boat immigrant. Every single property that I have in the US or every asset I own is fully paid for. That's just who I am. People tell me I'm what.
Speaker 2:Chris, simplify has a number of funds and obviously you've got this India Fund I-O-P-P. I want you to talk about that fund for a bit and maybe explain for those that are listening how the relationship with Anupam works. I don't know if people really understand what the whole advisor-subadvisor dynamic looks like.
Speaker 3:Sure as An don't know if people really understand what the whole advisor, sub-advisor dynamic looks like, sure. So, um, as I mentioned, he connected, uh, through a mutual acquaintance with some of the simplify folks a couple years back and we surveyed the landscape like what does the india opportunity set look like in terms of what's already out there? A couple things became clear. One is there's there's very little in the way of active management in indian etfs. Um, that's one number. Two, if you look at the actively managed like mutual funds really not doing well, um, you know it takes a lot of I already mentioned there's 6 000 plus names like takes a lot of resources to do that. Uh, it takes a certain skillset, depth of experience, quality of analysis to tackle and capitalize on that opportunity set. And our thought was like well, these guys already have experience in India. They're clearly savvy investors. Maybe that's a space we can carve out for ourselves. And it's worked extremely well.
Speaker 3:At the risk of sounding shamelessly self-promoting, the fund launched in March of last year, by the end of the year, so nine months give or take worth of performance. It was up 10% relative to the peers and that peer group, despite being being primarily passive, tended to lag the benchmark. So you've got outperformance relative to your beta, you've got outperformance relative to the peer group. That, for us, is a recipe for success and it's, at the same time, priced extremely competitively. So our thinking is like it'd beass, like why not pay five basis points extra for the opportunity to get a heck of a lot more return, or sweat the asset the way that it works from a sub-advisory perspective, anupam and his team here in the US, as well as in India, are responsible for the day-to-day portfolio management decisions. Our role, in addition to making that available, is on the distribution. We liaise with our clients, people who already have exposure to India. Perhaps in other ways we can chat with making an allocation to India and taking advantage of all of what we've been talking about this morning.
Speaker 2:I want to talk about the how on that. How was that alpha generated? Are there certain portfolio construction rules on a problem that you tend to follow? Talk about sort of the process that you follow.
Speaker 1:So, michael, thank you for the question. So the portfolio management objective is taking advantage of India growth. And then to spend 30 seconds on the relative inefficiencies of the indices. So if you look at the market cap rate of the indices in India, a fair portion of the names, especially the higher weight, are IT export companies. For example, now, it export companies the Infosys, pcss, et cetera are Indian companies, but their markets are in the developed West, you know, developed West. They earn all their revenues or most of their revenues, in US dollars or euros, or Japanese yen or Australian dollars, you know. And all their clients are mostly outside of India. While you know, they obviously use, you know, relatively inexpensive exchange to tick. So you say, okay, what are the key performance indicators for these guys? What are the factors? And you know, if you look at, say, the US H-1B policy which is in the single, that affects Indian companies much more than Indian IT companies, much more than anyone else. Similarly, big exporters out of India are generic firms. Michael, chris or me, if you happen, in part of a healthcare system here, a generic drug available which you're choosing towards, quite likely that a generic drug comes from India. Now, what determines that is FDA approval process, fda approval process, medicare reimbursement In the UK it's an IHS reimbursement what kinds of other things? What are these companies going to do with India? And India grows? How much so, michael, when people are looking to say India is an exciting investment destination, these are not the companies. Similarly, there are two large, very large companies dominated by oil. India doesn't control the price of crude, but if a large portion of the revenue is for these companies one which is a conglomerate and the other which is a pure oil company they're going to have nothing, not do what India grows.
Speaker 1:So our process is focused purely on India growth and we are market cap agnostic, we are sector agnostic, etc. We are focused purely on the teams and our thriving India growth in the long term. We talked a little about demographics, other things like that, and our process goes something like this we take the universe, you know, use some relatively, you know relatively sort of. You know market gap slash, you know volume slash, some other metrics like that, and use that as a filter and basically, you know, take the universe down from, you know, the 6,000 or 7,000 stops that Chris mentioned, down to about 800. And then we sort of employ more specific factors to it. We just fill out further and then we apply what is our four-pillar process.
Speaker 1:We look at management quality, which is strongly important. We look at the imps that these businesses have or the industry has. The industry has, the industry has obviously all the PIs, et cetera, and then we disseminate down to 80 companies and on both 80 companies we do much deeper research, like building our own valuation models, and I'll talk a little about that because of, you know, because of India being expensive. So we do our own valuation models many, many different ways and we have high targets, both for a year, three years and four years. You know we meet with management, we do channel checks, et cetera, et cetera, et cetera, and from that universe then we actually select. You know we meet with management, we do channel checks, et cetera, et cetera, et cetera, and from that universe then we actually select. You know, between 25 and 35 stocks, you know which we believe are.
Speaker 1:In terms of portfolio construction, we have certain guidelines. I mentioned that we are. We have massive share, which is 10 plus. You know we look at a set cap. All the other good stuff would be a set plus. We are market cap, we want big candidatures and in terms of portfolio construction. We've got, you know, percentage of average candidature value, sector exposures.
Speaker 1:The other thing which is extremely important because of the number of conglomerates in the area and ultimate decision making, and ultimately we're making a lot of concentration. We don't want a certain amount of exposure to any conglomerate. We mentioned TCS, data manufacturing, everything from salt on one end to Land Rover Jaguars on the other end, and it's got a massive amount. It's got eight listed companies or whatever. But we don't want more than a certain percentage exposure to the target group and our process is quite you know. We want, every time a stock is up, we want, you know, at inception, no stock to be more than 10% of the portfolio. If you know, the stock goes up by a percent, we are reviewing, saying how much of this price growth is already outloaded. Are there better options out there? And nothing is a perfect percent down in the book.
Speaker 2:I think, Chris, some of the people that might be listening, they're hopefully going to be impressed by what they're hearing. They buy the argument for India, but they're worried about valuations. Now, in fairness, a lot of things overvalued. Us markets include China, a lot less overvalued, probably deeply undervalued at this point. What would you say to those that are maybe concerned about valuation when looking at India?
Speaker 3:I mean, if you buy the growth story and you look at, let's just say, a backward looking PE ratio, the 20s OK, that looks expensive, certainly, you know that's, that's almost Ten handles more than what China is priced at right now, 10 handles more than what China is priced at right now.
Speaker 3:But if everything that we are saying is right, or at least close to being right, with respect to the growth trajectory of India, if we have a good handle on the best in class operators within their industry, so whatever comes out of the screen, the four pillar process, and then makes it into the portfolio, then you'd say, okay, well, those are, those are actually higher growing companies. So we need to be looking at the four multiples and those four multiples like, okay, they're high, but they're high because you have an expectation of not just a year or two or three years of higher than average growth, but you've probably got 5, 10, 15, 20 years of higher than average growth and on that count they don't really look that expensive at all. And I'd go back to this notion of like. One of the things that attracted us to working with system 2 and vatapam uh was what he just mentioned in terms of like the philosophical grounding for the investment thesis in india is like these are.
Speaker 3:You know these are the best opportunity. Set in india is domestic growth story and with that in mind, like you look at these companies and you're like, okay, population growth, population is not going to peak for another 40. Of course you want to buy in at today's multiples because they will. Even if they don't get more expensive, even if those multiples don't improve, you're clipping a lot of earnings growth from those same names. So it's still attractive. But I mean, high valuations are one of the things that you have to deal with in India, but they don't look high in the context of what future growth is David Pérez-.
Speaker 2:Speaking of that opportunity set, anupam, I think it's interesting that it looks to me like more and more IPOs are getting put out there in India From a research and portfolio perspective. What do you do with IPOs when they're released in India?
Speaker 1:Anupam Sharma. We typically on day one would not include them in the portfolio. If there are interesting IPOs, especially that category leaders in new categories, we would typically take a very small position. You know very small position. You know in the first, say three quarters, very small position. You know in the first say three quarters. And, michael, that's primarily because you know private companies essentially behave quite different from public companies. We want to see, typically, we want to see someone go through, you know, three to five years of being a public company, being a public company and then saying could this be sort of full rate? So again, while India is extraordinarily frothy, and especially last year where there was tremendous primary capital market activity, including IPOs, et cetera, et cetera we typically will stay away from those in the long-running context.
Speaker 1:Here we're looking for three to know, three to five-year price appreciation and target, you know, and for IPOs of brand new companies, in spite of how well we think we know them and how well they present, et cetera, till we actually see them, sort of you know, deal with you know, public numbers and publishing quarterly results. We're not that confident.
Speaker 2:So in the U US at least, for obvious reasons with Trump, the major buzzword is deregulation. I am curious to hear how regulatory burdens or maybe deregulation in India are playing out. This kind of goes back a little bit to the entrepreneurism question a bit, but talk to me about the regulatory hurdles that some companies face and some hope that those get eased.
Speaker 1:Michael. What I'd say to that is that you know what is in the books versus how it sort of happens. There may be some sort of delta between the two and while on paper you will see sort of extraordinarily efficient processes to establish companies and to say you know, in reality it's quite a different matter. Now, for example, I explain to people in India that in the United States, you know, for me to start a business, you know to start a business I need to establish an LLC, go to the IRS, get an employee you know ID number, tax ID number and then with both those documents, go to a bank, get an employee ID number, tax ID number and then, with both those documents, go to a bank, open a bank account. Now I'm registered, I have a tax ID and I have a bank account for green buses. This can all happen technically within a day or two at the moment In India, not as simple Registration and we've shut down a company in India. It Took about seven or eight months to do that. It is a bureaucratic process. We are fairly onerous. There has been a lot of change or attempts to essentially streamline them and there's going to be seeing a lot of streamlining happening at different levels. The prime minister's office in India has a set of people who are charged with making life easy for large global foreign direct investors into India. But not everyone can access those guys. So this is people who are investing tens of billions of dollars to build energy businesses.
Speaker 1:The other huge issue in India is land acquisition. Land acquisition is a huge problem. It's a huge problem in India. In the United States and I'm not China is quite easy. It happens by director. It happens by director In the US. We can basically, you know, declare eminent domain and take over any property that we want In India. In India, not as easy, because you've got individual owners of land and there's no title insurance. So land ownership is disputed and lawsuits happen which could go on forever. In the earlier part of the state, probably around 2005, I forget the exact date you know POSCO, which is a large Korean steel company, pohang Iron Steel. They basically signaled their intention to build a steel plant in it and it took them six years in disputes on land acquisition before they gave up and left. Now a lot of that is changing, has changed, but land acquisition, labor laws etc, etc are still very archaic. Still very archaic. They are doing things to better them, but it'll still take some time and again, michael, you know everything's heading down, except for a year and a half has been a continuous.
Speaker 1:You know democracy since 1947. And you know democracy with its own independent judiciary, which you know works at a stage base, has its own problems. You know it's not the most conducive for growth. I think you know whether South Koreans or Japanese or anyone will tell you. You know that democracy is a terrible for growth but, as we know in the United States, it may be a bad form of government but it's still the best form that's out there. So I mean, if you look at the similarities, you know, between how multi-plural and multi-ethnic it is and a democracy that speaks English and, like the United States, we're both British colonies, right. So there's, you know the underlying. You know law, judicial system, et cetera have a lot of commonalities. You know, in spite of everything that you see on the ground it works.
Speaker 2:I want to pivot a little bit to China being on the opposite end of that spectrum. Again, going back to valuations, China, you can argue, is cheap, but then again it could be cheap for a reason I know. Simplify's got a relatively new China fund as well, Chris, so I'd like you to make the case for China, maybe as contrarian play, because it seems like nobody wants to invest in it.
Speaker 3:Okay, so let me answer the question I want to answer, rather than precisely the one you asked, michael.
Speaker 2:The way to do that without making it sound like you're doing that, is be like that's a good question, but you know what Better question?
Speaker 3:Well, I was at many years ago, michael, the way to do that without making it sound like you're doing that is be like that's a good question, but you know what Better question Right, and was that? Many years ago I heard Robert Reich, a former labor secretary, speak and he, he, he, he always enjoyed saying that Like when, when somebody asked him a question that he was like ah, I don't really want to answer that one, um, so that that's been the approach I've adopted. But the Are are like we don't have views on markets. It's simplified, like we're not going to tell you like oh, we, you know, we like long bonds here. These should be buying duration, we've got products for that. We don't tell you oh, we think bonds are overvalued to go short duration products for that.
Speaker 3:What we've tried to do is provide investors with tools right, and the tools come generally um the risk of over generalizing, those come in one of two flavors. There are some things where we think there's a better way to do this. Anupam, his team, iopp, this is a better way to invest. When it comes to China, I would say to an investor if you want to be in China've just launched a china, a shares fund, and it is the other approach that we take, which is it's a different way to invest. We think it produces a potentially superior outcome by virtue of the way it's constructed. We're not going in and picking stocks like that's very hard in any market, and pamupam knows this despite the success he's had. It's not easy. But in the case of China, what we've said is okay, we'll get you the exposure that you want in shares onshore, but the way that we've structured that fund is through the use of total return swaps.
Speaker 3:There is a we're talking about regulation in India unsurprisingly, a lot of regulation in China as well. One of those regulations is that you cannot short a stock. So the way that banks facilitate shorting in China is to build up an inventory of individual securities and then they effectively synthesize stock lending to investors so they can short. Note the use of the air quotes. Now banks don't want to be running that long equity position, so what we do is we say, okay, we will take your long equity risk in the form of a total return swap and effectively we split with those banks the stock lending revenue. So, long story short, just to summarize, the way that that fund works is we enter into those agreements with banks and that provides a funding advantage. They're willing to pay us something to take that exposure off of their hands. So you've got an incremental pickup, regardless of what the equity market does.
Speaker 3:Equity market goes down, unfortunate Among China. The equity market goes up right, but on top of that you've got this additional funding benefit. That funding benefit today is somewhere between four and a half, five and a half. So even if China does nothing, the structure of this fund will give you that additional pickup, incremental return in china. So again, it's hard for me to sit here and argue like, hey, I think you should be bullish on china. I could make that case. Um, you know, certainly there's a lot going on in terms of policy in China to try and stimulate domestic consumption number one. Number two, to try and alleviate some of the leverage that's built up. I want to translate that Leverage some of the debt that's built up, both at the provincial level, as well as dealing with some of the mess of the property sector. You can have your own views on whether or not that would work, but if you want to take exposure to China, I think this is an optimal way to achieve that.
Speaker 2:China of course has two competing issues with the US which could result in tariffs, and of course there's this kind of AI war that's going on with China. And of course there's this kind of AI war that's going on with China. Anupam, I'm curious about AI impacting India's economy, impacting the workforce, impacting productivity there, and then if there's any sense of tariffs being pushed on to India because we have Mr Tariff man as president.
Speaker 1:Let me answer the second part of the question. First, Indian exports to the United States are largely in services and pharmaceuticals. What sort of tariffs would those actually attract? I will point out the fact that the first meeting the Secretary of State, Marco Rubio, had was with the foreign ministers, or his counterparts from the group of four Australia, Japan and India right after the inauguration, which sort of does a natural bonding between these four, you know four obvious geopolitical reasons. So in alignment with the United States, it's quite sort of on the same side rather than the opposite side.
Speaker 1:The Western camaraderie that President Trump has with Prime Minister Modi should also not be discussed where they actually get along well. They get along well, and to the billionaire's ball and the parade all the billionaires that had dinner with Trump on the night before the inauguration. It was India's wealthiest man, also worth R and 30 per cent. Mukesh Ambani and his wife were at their dinner, as the foreign minister was at the November meeting. So there's a lot of alignment and you know a lot of the alignment has started during the first George H W Bush's time and through Clinton and George W Bush to sort of you know Obama, and there is, you know, strategic reasons for why the two countries align. We do not believe that India will be affected any which way that a lot of other countries could be, because of alignment and because of the nature of what's said.
Speaker 1:Coming to the first question, it is a threat to a lot of the lower-end business process, outsourcing type activity that goes on in India. But India has got a tremendous amount of STEM sort of you know brainpower that comes out just by the sheer number of engineers that the country produces and you know the emphasis on upskilling, on upskilling, you know, to offshore IT companies and BPO companies, essentially offering to you know their Western clients, is causing AI to basically take root. I mean we've hired, you know their Western clients, is causing AI to basically take root. I mean we've hired, you know, machine learning graduates in India, you know, almost 10 years back, like at you know prices which are, or at wages which are sort of laughable. I mean I won't say I spent more on dinner one night you know, multiple of that.
Speaker 1:I won't say I spent more on dinner one night. You know multiple of that. So again, you know the because of the very strong emphasis on education and you know the understanding. You know the understanding that most middle-class and low middle-class people that education is a way to bootstrap yourself into the high end, you know emphasis on education is huge and obviously today you see a number of Fortune 500 CEOs who are of Indian origin come from the IIT system. That's testament to the quality of the IIT. While it is a threat in the short run to youth employment, etc. It's not in the long run. Green power is there to take for an advantage youth employment, et cetera, et cetera. It's not in the long run. We borrow their full advantage of, to take full advantage of the AI.
Speaker 3:So can I just add one thing on this, to bring it back to the fundamental underpinning for what Anupam and his team are doing? It's a domestic growth story. Okay, well, how much of how much of the economy is reliant on that? China's economy is 54, 55% consumption public plus private India, it's like 70%. So, yeah, are the are the tick are? Is there potential for tariffs out there? Yes, but I would go back to the question of what is the likely impact, both probability and severity, on the Indian economy relative to the Chinese economy. I think this conversation is to hear how we do it. You know, one of the questions in the back of your mind is probably like OK, is that growth story vulnerable? I would argue India, in addition to all the reasons I mentioned, is inherently less vulnerable because of the economic structure.
Speaker 2:Chris, as we wrap up, for those that want to learn about the various products that Simplify has and learn more, in particular, about the India Fund, where would you point them to?
Speaker 3:I would point them to our website, simplifyus. All of the funds are listed there, both the India Fund, the China Fund and all the other tools that I referred to, the ETFs. You're also welcome to reach out either to me or to my contact, very happy to discuss any of these.
Speaker 2:Very interesting conversation, I think, a lot of really good perspective. I rarely do conversations around emerging markets that are this much of a deep dive, so I hope the audience enjoyed it. Learn more about Simplify at their website. Again, this is a sponsored conversation by Simplify and thank you to Chris for your interesting thoughts here.
