Amid expectations of a normal monsoon this year, the focus on agriculture stocks would be vital. Bill Barbour, director, investment specialist, Asia-Pacific, West Asia and North Africa, Deutsche Asset Management (Australia), in an interview with Vishal Chhabria and Jitendra Kumar Gupta, speaks about opportunities in this space and his views on Indian markets. Edited excerpts:
Why do you think investing in companies in agriculture or related businesses could be a good investment strategy in the long run?
Global agri-business is being propelled by five very strong tailwinds, and these would drive food prices higher over the coming years, as demand for food is likely to exceed supply. We believe companies operating across the agri-business supply chain are likely to outperform the broader share market. An important aspect driving demand is population growth, and this would result in about 100 million extra mouths to feed each year in the next decade. The second aspect is growth in per capita income in the emerging and developing world. As incomes rise from low levels, people eat more. In much of the world, there is a change from cereal-based diets to ones based on high protein. This is leading to exponential increases in the demand for grain, which is used to feed animals in feed lots. Today, about half the world’s population still earns less than $4,000 a year. So, there is huge potential for food demand increases.
Another important factor is we do not have enough agricultural land. We are losing land because of urbanisation and industrialisation. Statistics show per-capita farm land fell from 0.5 hectares a person in 1950 to 0.25 hectares in 2000. This is expected to fall to 0.19 hectares per person by 2020. Also, agricultural produce is increasingly used to make biofuel. So, the competition for land is driving food prices higher. There are weather-related supply shocks that appear to arise from climate change and global warming. All these factors mean companies operating across agri-business supply are likely to benefit from solving the problem of feeding the world.
How is your fund placed within the entire value chain?
Currently, six of the top 10 companies in our portfolio are from the fertiliser and agriculture chemical sectors. Of the remaining, two are global seed biotech companies, while two are global supply chain managers. We believe all these should fare well, especially as these are trading at good valuations after the series of market corrections since September.
You do not have any exposure to the Indian agricultural space.
There are very few agri-business share market opportunities in India. Though there are some tea, sugar and irrigation companies, most of the agriculture industry here is privately owned, controlled by the government or are co-operatives, such as Amul. Also, to feed the population here, the Indian government does interfere in the food pricing mechanism, which squeezes the margins of many companies. As a result, many listed agribusiness companies in India have not produced great returns for investors, partly because of price controls. So, there are very few good listed opportunities in which we, or Indians, can participate.
What do you think of the markets? Would you buy at these levels?
At the moment, though the Indian market has come down a lot, it is not really cheap. The one-year forward price to earnings ratio of Indian markets is about 11.0 times, while China is trading at about 9.2 times, Hong Kong 8.5 times, Russia 4.7 times (less than half of India), and Brazil 7.6 times (all Bloomberg price/earnings data as of June 6). So, compared to global markets, India is not compelling. But we believe Indian markets should trade at some premium, given the growth potential. I do not think these have bottomed yet, though I feel in the next 12 months, these are going to trade higher. I believe the time when no one wants to own something is the time you should be looking for opportunities. You should be contrarian in your investment strategies. Recently, in India, everybody wanted to own bond funds. So, it is probably the time to start buying equities.
What could be the turning point for global equity markets?
I would love to see some stability in the euro and the euro zone. One solution may be the European Central Bank issuing euro zone bonds, so that the interest rate pain can be spread across the entire union. If this happens, or other solutions are found, I think there could be a huge relief rally in equity markets globally, especially considering the current historically low valuation levels.