Delicensing Electricity Distribution

Power generation, transmission and distribution businesses in India have traditionally been facilitated by government-owned enterprises since independence. Around 1991, while power distribution continued to be licensed to state entities, power generation was opened up to the private sector in order to encourage more competition and to meet the growing demands of the country. There was just one problem – the State Electricity Boards (SEBs) which distributed electricity to end consumers were in such poor financial health that they could hardly be expected to pay for power generated by private companies. This led to the recognition that fixing the financial health of these SEBs took priority. A number of measures were announced in support of fixing the DISCOMs’ (distribution companies) books, but most of it never really delivered results. Why? Well, fixing DISCOMs’ books actually would require state governments to increase tariffs to end consumers. Even me, with my little political astuteness, can tell you that this wasn’t going to get any votes. But fairly soon, the state governments realised that could not afford to play politics around power sector issues, quite simply because there is only so much the DISCOMs could afford to subsidise. Their books got stretched, they were unable to pay to buy electricity from generating companies leading to power cuts – which proved even more unpopular among the population base.

One of the proposals that has been on the table for a long time now is to allow the participation of the private sector in electricity distribution and permit ‘open-access’ to the transmission and distribution system enabling customers to obtain electricity from any supplier. How would it work? Well, think about your landline telephone. You can get BSNL today or Airtel tomorrow or some other provider the day after. The infrastructure is shared between the operating companies and the customer has a choice of selecting between multiple suppliers. That’s exactly how.

This has been rolled out on a limited basis in Mumbai and to some large industrial electricity consumers. But a wide roll out across the country would be a game-changer to the power sector. More players will enter the scene to distribute electricity more efficiently and at better tariffs.  We may be able to choose the supplier by how electricity is actually generated. An environmentally conscious citizen can say no to a supplier who generates electricity through fossil fuels and say yes to another one who does renewables. Power cuts will reduce and inefficient players in the distribution space (as most DISCOMs could eventually leave the market. They could end up owning just the infrastructure).

Sounds great, isn’t it? Well, mostly. We will have to say good-bye to electricity subsidies. Not fun, is it? 😉

Perceptions & Expectations

This week, the RBI released its perception & expectation survey results for the month of January 2021. The perception & expectation survey is just that. A survey with a sample population of people to get their perception of the current economic/financial condition and their expectation for the future. The results are quite contrary to what the results would have been had the same survey been run with a sample population of stock market participants.

People’s perception of the current general economic situation in Jan-21 is much worse than the year-ago period and has only slightly improved compared to May-20.

People, in general, think that the employment situation has currently significantly worsened,

that price levels have increased

and that income levels have decreased.

They are however just as hopeful about future income as they were about a year ago.

Far more people said in Jan-21 compared to the year-ago period, that their spending has decreased on both essential and non-essential items.

The key takeaway is that the euphoria in the stock markets is not nearly matched with the morose perception and the cautious expectation demonstrated by aam admi in daily life. But the good news is that this perception and expectation have improved in the last couple of months and we hope to see that trend continuing.

How to invest to create long term wealth?

This weekend, I had the opportunity to interact with students from Narsee Monjee College of Commerce and Economics. It was such an enriching session, at least for me 🙂 Here are the slides from the presentation I made during the session.

A look back at 2020

Heard about negative interest rates?

Negative interest regimes are a fairly new-age phenomenon and a tool that central banks have used only in recent history. The idea behind negative interest rate programs is primarily to stimulate economic growth.

What happens in a negative interest rate environment?

  1. Banks will start lending more given that the excess liquidity they hold is being charged negative interest rates.
  2. Businesses will be more ready to invest in new ventures leading to job creation and increased demand for capital goods.
  3. The value of the currency will go down due to reduced demand for it causing exports to become cheaper.
  4. Individuals will feel encouraged to spend more increasing overall consumption/demand given that the money in their bank is returning negative interest rates.

While it is all well-intended, it is neither a win-win nor a free lunch. Banks and individual savers ultimately pay the price when interest rates turn negative.

The basics first - How do banks make money?

Banks tend to make money through what is called the net interest margin. This is the spread (difference) between the deposit interest rate and the interest rate on loans. This is their main source of income. So in theory, a positive or negative interest environment should not really matter because banks can still add a spread over the negative interest rate that they are being charged by the central bank and dole out loans. But the reality is quite different.

Banks are required to maintain a certain level of un-invested reserve capital in order to cater to regulatory requirements. The ratio of these reserves to deposits is called the CRR or the cash reserve ratio in India. Banks are also required to maintain additional reserves called the statutory liquidity in the form of cash, gold, central bank approved securities. In addition to these, banks regularly tend to hold on to excess liquidity as part of their regular risk management process. This is especially true in a recessionary environment and is done to preserve capital and keep non-performing assets low. Keep in mind that when the economy is not doing well, several businesses tend to go bankrupt and banks end up losing a lot of money lent to these institutions.

In a recessionary environment

In a recessionary environment, individuals and private investors significantly cut back on their consumption and investment decisions. Demand goes down, people save more and this money enters the banking system.

In an attempt to increase demand and push commercial banks to lend more money, central banks reduce interest rates. But when interest rates are already very low, central banks are left with no choice but send interest rates into negative territory. What that does is gives them the power to start penalising the commercial banks for holding excess liquidity instead of lending. This is negative for the banks.

However, no matter how much money we keep depositing in banks, they usually don’t charge us, individuals, negative interest rates. They can, but they don’t. This is because if they start charging us negative interest rates, we would start withdrawing all of the money we have in cash and hoard it at home. And this will cause all sorts of problems from more thefts & burglary to perhaps even run on banks.

Exacerbating this, central banks for over a decade now have embarked on what is called as quantitative easing/asset purchase program. This is nothing but creating “new money” out of thin air and using this new money to buy government/private sector bonds. Some of these are rated junk bonds with little to no demand from the general investing public at large. This in turn creates even more liquidity in the monetary system all of which finds its way back to the banking system, which is already suffering from an excess liquidity problem and negative interest rates.

You can see why the thought of this creates a headache for some of the largest banks and terror to their shareholders. It is also obvious why this causes nightmare to common individuals like us and savers. Our deposits are earning little or no nominal interest from the banks, and sometimes even earning a negative real interest rate due to inflation.

So, how do banks deal with this problem?

Banks have found innovative ways of managing these negative interest rate regimes. They have resorted to buying safe assets like government bonds. They have learned to discourage new deposits by charging wealthy individuals account maintenance charges. And now and again, have also increased loans to the private sector.

But desperate times can call for desperate measures. Recently, a bank in Denmark offered home mortgage loans at -0.5% interest per annum. You know what that means? If you took out a loan of 100 bucks at the beginning of the year, your total outstanding principal at the end of the year assuming you have made no repayments is only 99.50. Effectively, the bank is paying a part of the original principal amount. They can do this because parking money at the central bank can be even more expensive for them.

Well then, what about us individuals?

How does one manage negative interest rates or even low-interest rates? The answer to this lies in the basic economics of demand and supply.

Consider for a moment the amount of “new money” being created by central banks around the world. The supply of money available in the system is increasing significantly. But what about the demand for money?

 Money buys assets and commodities, and that’s where its demand comes from. But the actual supply of these assets (like stocks, real estate, etc.) itself is limited. So when the supply of money increases and the demand for money does not increase as quickly, the value of money depreciates and leads to inflation. This can lead to asset price inflation and “bubbles”.

This is one of the most fundamental concepts in economics and has implications in pretty much every single aspect of our daily lives. We need to wear this lens of demand & supply while looking at some of the bizarre things that are happening in our world today.

When the supply of money increases, its value depreciates against assets and commodities. Or in other words, equity, real estate, gold, commodities tend to appreciate while cash and money saved in bonds and fixed deposits suffer. But when there is so much gloom in the economy with economic contraction underway, how could one risk their hard-earned money in investments like stocks? And this is where financial risk management tools like diversification, stock selection & asset allocation come into play.

Creating wealth is important, protecting that hard-earned wealth is even more important. Subscribe to our free weekly newsletter to stay informed on how you can do just that.

Watch the skies before investing in airline stocks

This post was part of Equity Wednesday Issue #4

Richard Branson, the billionaire owner of Virgin Atlantic Airways, once said, “If you want to be a millionaire, start with a billion dollars and launch a new airline.” Here is a look at how stock prices of some of these deeply unlucky companies have changed since the beginning of this year.

Indigo’s share price is the least impacted amongst them all. What we don’t understand, is where this optimism in Indigo’s share price is coming from. The airlines which released quarterly results this week posted further losses to the tune of Rs.1,200 crores. To be fair, this figure is less than the loss they posted in the Q1 of this FY (Rs.2,850 crores). But it is still really significant. The total losses Indigo is about to incur this year will pretty much wipe out the entire profits they made over the last 4 years! Is the market seeing something we are not?

Let’s take a look at the skies. Here is a comparison of how many flights were in the Indian skies on different dates.

On Sunday 9th of August 2020 (3 months ago)

On Sunday 1st of November 2020 @ 10:53AM

Clearly the number of domestic flights in our skies have increased in the last 3 months. But that is only half of the story – They are still a long way to go to just match the number of flights we had in our skies a year ago. Take a look below.

On Sunday 3rd of November 2019 (1 year ago)

Also, notice there are a lot fewer flights above our seas – indicating that while domestic flights are coming back to life slowly, international flights are simply not.

Exacerbating the problem is this – it is not just that there are fewer flights in the skies, there are fewer people on board these flights. Load factor for Indigo was 65% in the most recent quarter vis-à-vis 84% during the same quarter a year ago. Here is a look at the load factor for all airlines across the country.

But here are the images that terrify CEOs of airline companies the most. Alice Springs, which is in the middle of the Australian desert, has an airport with an attached aircraft storage unit. Here is an aerial image of that storage unit about a year ago in November 2019. You can hardly see any aircraft in storage.

The same aerial image shot by a satellite last week looks like this. Those crowded white dots on the image are all aeroplanes packed up and stored.

The aircraft storage business is BOOMING! And based on our cursory view, the number of aircrafts in storage has only gone up in the last 3 months and not down! Recovery in airlines is going to take a really, really long time.

Tesla car owners keep saying, “if I’d bought Tesla shares instead of the car, my money would have tripled in the same time”. I can hear airline stock investors saying, “if I’d bought a plane ticket instead of the shares, my money would have taken me to places”. Well, may be not even that.

Making an investment in real estate in India? Read this first.

Real estate investors in India have had it tough over the last decade. Average inflation over the last 7 years stood at about 5% per annum and residential property prices across most major cities did not even appreciate by the same %. This was at a time when average housing loan interest rates were at 9% per annum. This chart from Knight-Frank shows this rather sad trend.

Source : Knight-Frank Research

This trend worsened as we got into 2020 as prices fell dramatically across most major cities. This chart below shows that.

Of course, this analysis is based on averages. Property investments are all about location, location & location. And no two places are the same. An investment made in Gurugram which has one of the highest supplies of unsold inventories in the country fared much worse than an investment in Panvel where Navi Mumbai’s new airport is coming up. But, on an average across the nation, any money put into real estate turned out to be one of the worst investments over the last decade.

Given, we are where we are, how should one think about real estate investments today? Should you invest in residential property?

To answer that question, we need to look at demand and supply factors that drive real estate prices. We will look at 3 demand-side and 3 supply-side factors to make a judgement call on where we are now and how these metrics could evolve over the next years and affect property prices. Dive in…

Real Estate in India - Demand-side factors

Interest Rates and Credit Availability

Interest rates are one of the biggest drivers of demand and prices. And this should come as no surprise to you. Lower interest rates lead to higher demand and higher demand leads to higher prices. Just to give you a few examples, year on year and in the middle of COVID-19 prices appreciated in Netherlands (+11.6%), UK (+5.8%), Singapore (+1.5%) and China (+4.9%).

Why? Primarily because of low-interest rates and availability of credit. As more and more people manage to secure loans at low-interest rates, demand goes up and prices go up. Interest rates in India are at a 15-year-low. This chart we published earlier shows the housing loan rates offered by SBI.

This bodes favourably for real estate and gives us confidence.

Real Estate +1 , Naysayers 0

Income levels

This should also not be a surprise at all – As real income goes up, demand goes up. The massive property boom we witnessed in the past in places like Bengaluru and Hyderabad was primarily driven by increasing income levels in the IT sector. The only proxy we have for real income is per capita income at a country level. And how has that done? Take a look.

Gross national income per capita in India grew by 6% in the last decade. In 2018-19, income levels grew by 5% and in 2019-20, it grew by a mere 3%. Given we are in the middle of one of the worst economic slow-downs in history, it is safe to assume that income levels aren’t going to grow rapidly over the next few years. But more concerningly, if job losses increase in the economy (some are saying it could), people will postpone buying decisions till they have more visibility of future earnings. And that could lead to a total collapse in demand.

Real Estate +1 , Naysayers +1

Urbanisation

The third factor which drives property demand in cities is the migration of our population from rural to urban areas. But studies after studies have concluded that people mobility from rural to urban areas in India is one of the lowest in the world amongst comparable countries. Several reasons have been postulated – low wage gap between cities and rural areas, the loss of community and informal ‘insurance’ network upon migration etc. COVID-19 has only accentuated this problem. We have witnessed large scale reverse migration from cities to rural areas and that isn’t going to fix itself over-night.

Real Estate +1 , Naysayers +2

While this is a trend across the country, regional differences do exist amongst the different cities and regions. So, before you go buy a property in a locality, take this into consideration – Are people moving into or out of the neighbourhood? If they are moving out, wait for prices to correct.

Real Estate in India - Supply-side factors

Low interest rates

While low interest rates increase demand for property, it also decreases supply of available properties in the market. How? Here’s how – Let’s say home loan interest rates go up to 20%, tomorrow (Unlikely, but indulge me for a moment). Your debt burden, monthly EMI and interest payments will all go up significantly and consequently you will try your best to sell the property off. In contrast, when interest rates go down, debt burden of existing homeowners also goes down. They are consequently in much less of a hurry to sell the property off. Those sitting on the edge about selling their property off, will feel encouraged to hold on to their houses given the benign interest rate environment. So low interest rates, reduce supply and increase prices.

Real Estate +2 , Naysayers +2

Existing unsold inventory

If there is only thing that has led to very low returns on real estate investments over the last decade, then it is this – The massive amount of newly built unsold inventory with developers. While this problem is largely starting to resolve itself, cities like Mumbai, Delhi and Kolkatta are still grappling with this issue. Here is a look.

We are however starting to see some green shots – Knight Frank’s report suggests that over the last 4 years, sales have consistently been more than new launches. This actually goes a long way in clearing up the existing inventory and reducing oversupply in the country. There is more good news – Developers are starting to level with buyers by finally offering them better pricing deals both in the form of direct price discounts as well as other non-price deals. For instance Tata housing is offering its buyers home loans at 3.99% for the first year to buy their properties.

If all of this leads to lesser supply in the country, prices will finally start going up. And we are hopeful.

Real Estate +3 , Naysayers +2

New housing development start-up

The government & RBI launched an index called the Housing start-up index in 2011 to measure the number of new residential property development launches. Unfortunately, for whatever reason, this was discontinued.

So, it is very hard to measure the level of new activity in property development. But based on what has been making news, most large developers in India like Godrej properties, Purvankara seem to be focussed on starting-up new developments in Bengaluru. Once again, this factor is very location specific and you’ll need to take into consideration if new launches are significantly increasing housing supply in the area of your interest. If they are, property prices are probably not going to appreciate very much.

No points for either of them in this round.

Real Estate +3 , Naysayers +2

Apart from these demand and supply factors, there are two other key considerations to be made before taking the plunge.

Real Estate in India - Affordability

In early 2019, Knight-Frank undertook a survey to measure affordability of residential houses across different cities in India and how this has evolved over the last decade. And their key finding is in this chart below.

Source - Knight-Frank Research

Their research suggests that the optimal price to income ratio for houses is 4.5. Against this baseline, housing in cities like Mumbai and NCR are less affordable (more expensive) and property prices in cities like Kolkatta and Ahmedabad are more affordable (less expensive). The general rule of thumb in finance is to buy cheap and sell expensive. And the fact that in India as a whole, property prices are once again starting to become more affordable compared to income levels is positive for real estate investments.

Real Estate +4 , Naysayers +2

That house you had in mind, how does its price stack up against the average income of people in your region/age/employment group? If it is too expensive, stay out of it.

COVID-19 and International considerations

COVID-19 has made a serious impact on the residential property market worldwide. Hopefully, we will have a vaccine soon. But the key trend we are observing is the mass exodus of people from cities to sub-urban areas. Employers are going to keep the option to work-from-home for a long, long time to come. And this means that staying in the centre of the city, close to activities of commerce and offices is no more a necessity.

This outward movement of people from cities has led to increasing vacancy rates in rental properties. Tenants in cities like Sydney and New York are starting to re-negotiate rentals with their landlords. But more importantly, while property prices in cities are stagnating, they are increasing in sought after beach towns, nature reserves and all the places where the quality of life and well-being is better.

India does not have much of a sub-urban living culture. But COVID-19 could change that. And if it does, property investments in some of the most expensive and sought after city-centre localities like Lavelle Road (Bengaluru), Kilpauk (Chennai), Jubilee Hills (Hyderabad) and Tardeo (Mumbai) will do terribly. Watch out.

Real Estate +4 , Naysayers +3

To sum it all up

In the short term, lower interest rates will encourage more people to come out and buy properties. This, combined with the trend we have seen of reducing unsold inventory will provide cushion to property prices that have been falling or at least failing to appreciate for the last decade.

But the economic impact of COVID-19 needs to be dealt with. And we need to start seeing resolution to some of the structural issues in our country like low growth in income levels,  low-affordability of housing in cities like Mumbai for there to be a meaningful appreciation in prices.

Our conclusion is this

A buyer looking to purchase his/her first or second home might find really attractive deals over the next few quarters. An investor buying a property now to make a killing in the real estate market will be sorely disappointed.

Where to buy real estate in India?

If you are still reading and you still want to buy a house, here are our top picks for the most promising spots to make a real estate investment in India. We have arrived at this list after looking at metrics like affordability, the existing supply of unsold inventory, the trend in new launches, the growth rate in property sales and age of inventory. Take this only as a guide.

COVID-19 Vaccine – Where are we? (NOV 20)

Never in the history of this world have so many people wanted to be pricked by a needle as bad as they do now. This post takes a quick look at the vaccine development process, where we are with COVID-19 vaccine and who the lead contenders are.

There are typically 5 phases in the development and monitoring of a vaccine. And you can get a quick summary of those phases in the infographics below.

We have about 213 different COVID-19 vaccine candidates under development, 37 of which are in clinical trials and just 10 are in phase 3 right now. Half of those are being developed in China and Russia. Safe to say that these will be met with ample scepticism. But there are 4 COVID-19 vaccine candidates being developed by western pharmaceutical companies that are near the finish line. Here is a look.

Top 4 COVID-19 Vaccine Candidates

BNT162b2 – In a joint development with BioNtech & Pfizer

BNT162b2 is clearly in the lead with its phase 3 clinical trials. Over 40,000 people have had 2 doses of either the vaccine or a placebo. Once a certain number of those people contract the virus, an independent data monitoring committee will review the numbers to check if the vaccine is effective against the virus. We will know this by mid-November. Best case scenario for humankind – their vaccine could be the only candidate to get authorisation from the US FDA by the end of the year. The US government has signed a contract securing 100 million doses of this vaccine if it is successful for $1.9Bn. The European Union has signed a contract to secure 200 million doses. No word from the Indian government yet. The vaccine will be manufactured in Pfizer’s facilities in US, Belgium, and BioNtech’s facility in Germany.

mRNA-1273 – In development with Moderna

mRNA-1273 isn’t too far behind and could be the second one to get approvals. Phase 3 clinical trials are underway and the company is waiting for its results. Moderna has also signed a contract worth $1.5Bn with the US government to produce 100 million doses. The company is in the meantime manufacturing hundreds of thousands of doses of the vaccine at risk to start supplying in case they get FDA approval.

AZD1222 – In development with AstraZeneca/Oxford university

AZD1222 – Currently in joint development with AstraZeneca and Oxford university, their phase 3 clinical trial was put on hold on the 6th of September when one individual involved in their clinical studies experienced unexplained illness. Last week however, the US FDA authorised the resumption of the study.

JNJ-78436735 – In development at Johnson and Johnson

JNJ-78436735 was also put on hold in mid-October when one patient involved in the trials went through a serious medical event (stroke). But no clear cause was identified and hence the vaccine will now enter phase 3 trials.

Bharath Biotech - In development at home

At home, Bharath biotech, Indian council of medical research ICMR, and the National Institute of virology have tagged together to develop a vaccine that received approval to kick off Phase 3 clinical trials. Over 28,500 people will be involved in this study which is due to start soon.

Given that the stakes are really high, market pundits are watching quite keenly on the developments. Indian investors looking to get exposure to the equity of some of these companies can consider direct investments on these stocks or indirectly through a mutual fund that holds positions in them. At this time, there is only 1 healthcare mutual fund that does that. But the risks are very high and it is not for the faint-hearted.

Read up about the different kinds of mutual funds and who they are meant for before you invest in one.

Cement companies make a come-back

At least 3 cement companies have announced results so far and they are all having a field day! Sales has fully recovered, and businesses have reported record operating profits growth from the year ago period.

The cement industry in India has long suffered from chronic over capacity, low utilisation, high input prices and low-pricing power amongst the players. But this has changed significantly over the last few years.

  • Large scale consolidation driven by players like Ultratech Cement improved the competitive landscape
  • Low realisations and wafer-thin industry profitability kept new entrants away

Both these factors have led to higher factory utilisations and better pricing power for the incumbents. During the recent quarter, higher sales was primarily driven by better price realisation. The country witnessed average cement price increase of 3%-5%, while the southern region witnessed price increase of 14%. Capacity utilisation at the overall industry level is now around 75% – 80%. Things are looking like they’ll improve even further.

 

  • Demand is starting to increase. Kumar Mangalam Birla said this week that this increase in demand is being driven by migrant workers moving back to their hometowns. “People are now building a new home, they’re adding one more room to their existing houses out of safety — just in case they have to stay at their homes for longer,” Birla explained. In addition, government’s fiscal spending push in the infrastructure sector is slated to increase demand for cement even more.
  • Prices of key raw materials used in cement production have significantly decreased over the last few quarters. Prices of crude oil, pet coke, PP granules and energy/fuel have gone down by anywhere between 5% and 55% over the last one year. This has meant that profits have grown faster than sales.

Against this backdrop, cement stocks have made significant gains in the stock markets over the last 2 weeks.

China’s consumption led recovery

India has been a consumption led economy – We make more, we consume more and the economy grows. But China’s economy was different. Till now. For the last 40 years, economic development in China was led by export growth. Around the time the world was grappling with financial crisis, a third of the Chinese GDP growth (33%) was driven by cheap exports. But with increasing salary levels and the slow disappearance of cost arbitrage, this figure has come down to 20% – The same as it is for India today.

But in spite of this reduction in exports, China’s GDP data for q3 of the calendar year 2020 showed that the economy grew by 4.9% compared to the same quarter a year ago. Imports into the country surged by 13%. Key metrics like retail sales, vehicle sales, property investments etc., gained indicating that demand was robust, and recovery was broad based across sectors. IMF said that China could be the only major economy to record positive growth this year (+1.9% projected). This is when countries like US (-4.3%), UK (-9.8%) and India (-10.3%) are expected to shrink.

First things first, what is going on? The generally accepted hypothesis is that China is going the India way – Turning from an export led economy to a consumption led one. And if there is one country at all that call pull that, it is China. Consider this – Your propensity to consume is directly proportional to the amount of money you have in your bank account. Agreed? The Chinese have close to $30 Trillion in money stashed up in bank deposits. That is 2X their annual GDP. The same figure for India is 0.66X and that for US is 0.5X.

 

Now, if you are an astute equity investor, you are probably asking yourself, “How do I get a piece of that action?”.

 

Turns out, it is quite simple. There are China focussed fund of funds which will allow mutual fund investors in India to get exposure to Chinese stocks. One such fund recorded 54% gains in the last 1-year period (if you look it up, you’ll find out which one we are referring to in no time).

 

The chart below shows the top 5 companies (all businesses focussed on Chinese consumption) held in the portfolio of this mutual fund and their revenue/profit growth in the most recent quarter.

There are favourable tailwinds for some of these businesses. TSMC for instance is the world’s largest semi-conductor chipmaker and is expected to make a windfall on the back of strong demand for 5G phones. Alibaba owned (33%) Ant financial is expecting that its upcoming IPO will be the largest ever in the world when it lists in Hong Kong and Shanghai.

 

There are significant risks in the short term too, however. The growing tension between US-China has meant that Chinese tech companies and chip makers like TSMC are getting caught out in the middle. The US election could prove decisive for some of these businesses. But for an individual investor who is overwhelmingly invested in Indian equities, investment in China provides an important geographic diversification in the portfolio.