Slowdowns, trade wars and reform – a quick guide to emerging markets
Negative headlines have dominated the sphere of emerging markets in 2019, with the region facing...
Earlier this month, the International Monetary Fund cut its estimate for India’s growth this year from the 7% it projected in July to 6.1%, and called on the country to use monetary policy and broad-based structural reforms to address cyclical weakness and strengthen confidence.
But this hasn’t put off Juliet Schooling Latter, FundCalibre research director, who is investing 100% of her monthly pension contribution into Indian equities.
Here she explains her enthusiasm:
“India has been my preferred emerging market for the best part of a decade. Home to 1.37 billion people (twice the population of Europe), 27% of whom are under the age of 15, it’s always been a young, entrepreneurial country.
“Since Modi came into power in 2014 it has gone from strength to strength and, importantly from an investment point of view, the ease with which businesses can operate there is transforming,” she said.
“I’ve changed my monthly pension allocation to be 100% in India equity funds. It’s a high risk market and won’t be for every investor, but I’ve got a good 15 years or so until I retire and, by investing monthly, the almost certain volatility of the Indian equity market won’t upset me in the short-term. Last year was tough: the economy has gone through a cyclical turndown and small and medium-sized companies suffered, but I now think it is set up for long-term sustainable growth.”
Modi has already had a number of successes: inflation has come down significantly, bad loans have been tackled with recovery rates improving, and he’s taken steps to reduce the black economy. Having won a landslide election earlier this year, his “Make in India” campaign – the primary goal of which is making India a global manufacturing hub, by encouraging both multinational and domestic companies to manufacture their products within the country – is now a priority.
Having already announced several measures to revive growth in August, and cut interest rates a number of times, the corporate tax rate was slashed in September, prompting an equity market rally.
Matthews Asia Pacific Tiger has more than 17%* of the portfolio invested in Indian companies. The company commented: “The Indian government announced a significant cut in corporate tax rates from an effective rate of 34% to roughly 25%, with additional cuts for manufacturing companies (to 15%). Although the hit to fiscal revenues is estimated to be approximately 0.7% of GDP, corporate tax cuts are estimated to boost broad corporate earnings higher by 6-7%. Overall, market participants have interpreted government actions to be supportive and broadly positive and Indian equities were some of the strongest regional performers late in September.”
India used to be one of the least competitive Asian countries – on a par with the Philippines. The new rate will make it one of the most competitive and the most competitive of all for manufacturers.
The managers of IIFL India Equity Opportunities fund added: “The boldness of the Finance Minister’s announcement to cut taxes positively surprised markets and clearly reflects a renewed focus to kickstart investment-led growth and make Indian manufacturing more competitive than its peers. While the announced tax cut is a good start, a lot depends on follow-up reforms across labour, land acquisition, judiciary, manufacturing, etc. The largest beneficiaries of tax cuts are consumer companies, energy, industrials and automobiles. We believe that the move is a first step in the government’s attempts to revive the investment cycle.”
Stewart Investors Asia Pacific Leaders has 34%* invested in Indian companies, in a recent update the managers said: “This weighting is split roughly 50:50 between domestic companies and those generating sales from the country and we’ve invested across multiple industries – from companies selling mortgages and shampoos to those selling tractors to Indian farmers.
“From an economic standpoint India is crying out for reform and Modi has made some serious efforts to start that process. But a lot more still needs to be done. Someone pointed out to us recently that if you start a company in India with more than seven employees, you are already subject to the trade union act. With 10 or more, other laws come into effect, at 100 people the industrial disputes act comes in – so the incentive to grow business is not there. Those kinds of regulations are hampering the rise of many companies. So there is a huge amount of work to do to liberalise the economy.”
FundCalibre has three Elite Rated Indian Equity funds:
Manager Hiren Dasani says that “Like the population, investment opportunities in India are still young and growing.” This fund invests in companies of all sizes and the team never say no to a meeting, believing they can always learn something about the industry, even if it they have no intention of investing.
This is also a multi-cap fund but the managers have a focus on companies that treat minority shareholders well. It’s also very concentrated in a smaller number of businesses, although sector diversification is still strong.
This fund has a wider remit and invests in companies which are either based in, or have major operations in India, Pakistan, Sri Lanka or Bangladesh. The managers tend to have a concentrated portfolio of around 35 stocks, which are chosen from across the market-cap spectrum and which can contribute to and benefit from the sustainable development of the countries in which they operate.
*Source: fund fact sheet, 30 September 2019