Continuing our countdown to Christmas, Nick Price discusses India's e-payments revolution and the opportunities available in China's burgeoning consumer market.
In November, Narendra Modi's Indian government announced 500 and 1,000 rupee (broadly equivalent to £5 and £10) notes would cease to be legal tender by the end of the year.
While this has caused some short-term chaos, particularly in India's thriving cash economy, it is further evidence of the government's determination to enact bold economic reform. Among other things, this policy is likely to offer long-term benefits to some of India's better-run banks as digital transaction volumes increase.
In addition to the longer-term positive effects emanating from its ongoing reform programme, the country benefits from a huge and growing population and GDP growth of 7% to 8% per year.
At a stock level, our favourite position in India is HDFC Bank, which is the country's largest private bank. The company has taken a very forward-looking approach towards digitising its back office and is growing its loan book at a rate of 20% per year.
As the company has already invested heavily in its infrastructure, it appears well positioned to reap the rewards of this growing loan book without being exposed to significant growth in overheads.
China opportunities
Not all banks in the developing world are created equal though. In China, the government does its banking sector a disservice by continuing to drive banks' lending policies. As a consequence, many fundamentally flawed state-owned enterprises continue to receive bank loans despite the very real possibility they will be unable to service their debts in future.
Our on-the-ground research suggests a significant portion of Chinese loans could turn bad, this is a major concern and means at some point China's banks will almost certainly require recapitalising.
This is not to say China cannot offer us interesting opportunities. The country remains very much a burgeoning consumer story. This once again became apparent on 11 November 11, otherwise known as Singles Day.
This day originated as a celebration of singles, but has now turned into an online shopping event that dwarves even Black Friday in its scale. Alibaba alone saw $18bn-worth (£14.6bn) of sales, up from $14bn in 2015.
Overall this consumer story is well understood and yet some companies are clearly better placed to benefit than others. When it comes to finding the key beneficiaries, our focus is on market leaders that operate in under-penetrated areas with significant structural growth potential.
Nick Price is a portfolio manager at Fidelity.
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