India Capital Growth (IGC ) fund managers have built up an overweight position in financials following prime minister Narendra Modi’s nationwide push for families to have a bank account.

Gaurav Narain and David Cornell believe ‘structurally undervalued’ financial companies are a cheaper way to access the spending habits of 1.2bn Indians as increasing numbers of people hold money in banks rather than live off cash and loans.

‘One of the few sectors in India that remains structurally undervalued in our view is the banking sector. India is the fifth largest economy in the world. By 2026, it will have overtaken Germany to be the fourth largest and by 2030 it will have overtaken Japan to be the third largest,’ Cornell (pictured below) told Investment Trust Insider.

‘If the economy is going to fulfil its potential, the banking sector has to be front and centre of that journey. It has to be in a position to extend credit profitably to a combination of consumers and corporates who are looking to expand in India.’

Cornell illustrated his point by pointing to India’s mortgage statistics, which make up just 11% of nominal gross domestic product (GDP), almost a seventh of the UK.

Mortgages as a percentage of GDP

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Country	Mortgages as % of nominal GDP (%)
India	11%
China	18%
Thailand	20%
Malaysia	34%
Japan	39%
Singapore	44%
Germany	45%
USA	52%
Australia	56%
UK	68%
Denmark	83%
Netherlands	89%

Source: European Mortgages Federation, Hofinet & HDFC estimates for India

The London-listed Guernsey-domiciled trust is heavily exposed to the consumer, with financial services making up 22.8% of the portfolio at the end of May, alongside consumer discretionary and staples at 25.5%.

Top positions include Federal Bank, Indusind Bank, City Union Bank and IDFC Bank.

However, given the inflationary levels pressures across the world, the pair are worried about consumer appetite holding up, particularly as India imports 85% of its oil.

‘We are worried about the inflationary impact of rising commodity prices and rising oil prices, so we’re conscious of whether consumer demand can hold up in this current environment, given our exposure to the consumer,’ Cornell said.

‘We’ve been working very hard to try and understand what the reaction in the physical market to this consistent increase in prices that companies have been forced to put through to their customers to offset the increase in raw material prices that is going on.’

So far this year net asset value (NAV) of the volatile ‘mid cap’ fund has fallen 7% while the BSE Midcap benchmark has been flat. However, the shares have declined 13%, widening their discount to NAV to nearly 17%. This could offer an opportunity if it persists as IGC will hold its second tender offer at the end of next year when it will offer to buy back its shares at a discount of just 3%. The first tender offer last December was priced at a 6% discount. It was introduced after shareholders voted to continue the fund after a period of poor performance two years ago.

Cornell was also bullish about the Indian’s market’s future performance, given its annualised outperformance among other major indices across the globe over 10, 15 and 20-year periods. 

 Annualised returns of major indices

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Index	10-year returns	15-year returns	20-year returns
BSE Midcap (India)	14.80%	9.10%	Did not exist
BSE30 (India)	13.40%	9.40%	15.40%
MSCI Brazil	-1.70%	0.00%	6.50%
MSCI China	4.90%	4.50%	8.10%
S&P 500 (USA)	14.40%	10.10%	7.80%
FTSE 100 (UK)	3.60%	0.90%	2.00%

Source: Bloomberg; Ocean Dial Asset Management

‘If you look at India’s investment returns over 10, 15 and 20 years, what it will show you is it is the best performing market in the world. I’m talking about most developed and most developing markets; it’s outperformed the US, China, Brazil and the UK. It delivers about 14% annualised return in sterling every year. That 14% comes from the 20% growth with a discount for currency depreciation,’ he said.

Over 10 years IGC has racked up a total shareholder return of 218%, beating large-cap rivals at Aberdeen (ANII ) and JPMorgan (JII ) but behind the 285% of the BSE Midcap index.