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After a strong run in 2017, Indian equities have suffered a fall from grace in 2018, with the MSCI India index having fallen by 8.5% year-to-date in sterling terms*.
Does this mean that investors should be wary of Indian equities, or have recent events opened up an attractive buying opportunity? We take a look at the country’s economic background, its market movements over the years, and whether Elite Rated managers have a positive or negative outlook or India.
Formerly one of the largest manufacturers in the world (specialising chiefly in cotton textiles, spices and ship-building), India suffered from deindustrialisation under Britain’s reign in the mid-18th century, with its industrial output falling from 25% globally in 1750 to 2% by 1900**.
Regulation, trade barriers and increased public ownership of businesses were introduced under the Republic of India in 1947. Then, following the Indian financial crisis in 1991, the central bank reversed many of these policies. This led to significant growth.
Another big turning point for India’s economy was 2014, when pro-business Narendra Modi was elected as prime minister. He embarked on a series of economic reforms, such as investing in infrastructure, opening more sectors to foreign investors and creating a unified national tax. Many of the proposed reforms – including improving financial regulations – are yet to be rolled out.
When it comes to markets, the MSCI India index is actually one of the best-performing emerging market indices since the turn of the millennium, having achieved a whopping return of more than 600%*. It hasn’t been plain-sailing, however, as the index was one of the worst performers during the bear markets of 2008 and 2011*.
Hiren Dasani, who heads up the Elite Rated Goldman Sachs India Equity Portfolio, said the MSCI India has fallen year-to-date because of both global and local factors. A combination of anticipated faster interest rate hikes across the globe and trade war concerns, alongside investigations into lending discrepancies in the Indian public sector banking space, have bruised short-term investor sentiment.
“In our opinion, the structural case for investing in Indian equities still remains intact and we believe the markets have tempered their nervousness surrounding these concerns, focusing back on fundamentals as we continue to see overall growth pick up,” he said.
The fund’s largest sector allocation is to financials at almost 25% of the portfolio. Aside from large and mega-caps, the manager holds a 24% allocation to mid-caps and a further 15.5% in small-caps. Its largest individual weightings though include IT services firm Infosys, car manufacturer Maruti Suzuki India and HDFC Bank***.
The team at Jupiter believe that technological advancement in India is rapidly boosting economic growth. In 2009, for example, the Aadhaar (a unique identity number assigned to every Indian resident) was rolled out and, to-date, 1.2 billion people are registered****.
This has paved the way for a number of significant reforms, including Direct Benefit Transfers (when benefits and subsidies were directly paid into bank accounts) which boosted consumer spending. Not only this, he said it has reduced leakages by cutting out the middle man and stopping payments from ending up with the wrong beneficiaries.
Jonathan Schiessl, who runs the Elite Rated Ashburton India Equity Opportunities fund, said there are numerous other long-term structural factors in place which stands India in better stead than many of its emerging market peers – such as shareholder-friendly companies, a young population and well-managed companies.
“Unlike many emerging markets, the concept of the shareholder is not a new one in India. It’s about how much attention the individual companies pay to it,” he said.
“You also have some of the best-managed corporates in the globe in India. This is because, when you have such a high-growth economy, your business might be two or three times the size that it is today in 10 years’ time. You have to think really carefully about planning for expansions. That is why I think Indian corporates are very good at thinking for the long term.”
In terms of how the Indian equity market has behaved so far this year relative to its emerging market peers, Schiessl said it has opened up a wealth of opportunities. He said this is particularly apparent within the mid-cap space, because it is markedly underresearched and has been more volatile recently.
“There are still a lot of stocks that aren’t well covered,” he explained. “The other differentiator between India and many other markets is that the index isn’t being driven by a small handful of tech stocks. There are no Googles, or Facebooks, or Alibabas, or Tencents.
“Last year, Facebook’s market cap was worth more than the entire MSCI India index. China has been driven by Tencent because it counts for such a large portion of the index. In India you haven’t had that issue – if people want these kinds of stocks, they put their money elsewhere. But for everything else, there are plenty of undiscovered opportunities to be unearthed in the Indian equity market.”
*Source: National Bureau of Economic Research. http://www.nber.org/papers/w10586
** Source: FE Analytics. Total return in sterling terms. Correct as of 19 April 2018
*** Source GS factsheet, March 2018
**** Jupiter: The modernisation of India over the past decade. March 2018.