Back in March, I wrote about JPMorgan Indian (JII). The period since then has been a volatile one for India’s stock market and, unfortunately, once again JII trails the four-strong pack of funds dedicated to investing in the country. The standout winner has been Abrdn New India (ANII), which has seen a 22% jump in its net asset value (NAV) over the past three months.

However, ANII’s good run of performance has not much impacted on its discount. That may reflect the trust’s poorer relative returns in 2021 and 2022. The question is, can the trust continue to deliver?

Fortunately, as the trust has recently published its results, manager James Thom has been over visiting investors and I managed to catch up with him.

India is increasingly important, and not only in the global economy, where it has overtaken the UK to become the fifth largest by GDP. Investment bank Jefferies reckons that by 2027 it will also have overtaken Germany and Japan to rank number three behind the US and China. It is doing so by virtue of having some of the fastest growth – the International Monetary Fund forecast is for 6.25% GDP growth in 2024.

A large part of the credit for this must go to prime minister Modi, who has just won a third term in office. However, the election win was less convincing than many had expected and that contributed to the volatility that I was talking about earlier.

Thom thinks that may mean that the government may not be able to achieve some of the big labour and land reforms that it had planned, but many ministers remain in place and the commitment to drive economic growth remains. It helps too that inflation is under control and there is scope for interest rate cuts.

With China looking lacklustre, my guess was that foreign investors had been switching out of that country into India. However, Thom thinks that India’s great run of performance (the MSCI India index is up 114% in local currency terms over the five years to end May 2024) has largely been driven by domestic investors.

Their enthusiasm has pushed up valuations – at the end of May, the MSCI India was trading on a forward price/earnings (p/e) ratio of 22.3 times, which compares to 9.9 times for the MSCI China, 17.4 times for the MSCI All Countries World index, and 21.1 times for the S&P 500.

Thom is cautious on the Indian market’s valuations but feels that good-quality companies with decent earnings growth can justify high ratings. Those are the sorts of companies that he wants to have in his portfolio.

Higher conviction

The ANII investment process has evolved in recent years. There is a greater emphasis on backing the strongest-conviction ideas. The board has also encouraged Abrdn to delve more into the small and mid-cap market to take advantage of some exciting opportunities there.

Thom is being selective given that these smaller companies tend to be more highly-priced (the Nifty Midcap 50 index is trading on a forward p/e in the high 30s). Currently, about two-thirds of the portfolio is in large caps (stocks with a market cap of more than $10bn).

The potential of this approach is demonstrated by ANII’s success with Aegis Logistics, which offers storage and distribution of liquids and gases, and which was an overlooked small-cap when ANII first invested, but at the end of May 2024 was ANII’s highest conviction position (about 4.6% of the portfolio). It rose through the ranks thanks to strong performance, up about 130% year to date.

The sell discipline has also been tightened up. A tail of lower conviction positions has been sold and the manager has been quicker to exit stocks when doubt has arisen about the investment thesis. Some good examples of that are selling Asia Paints when the competitive landscape suddenly deteriorated, Kotak Mahindra Bank after a management change, and in the IT services sector, where some sales helped avoid the worst of a sell-off.

The portfolio is run on a stock-picking basis but there are some themes within the Indian market that Thom has been keen to exploit. One of these is a recovery in residential real estate sales, a sector that had been under the cosh. ANII has positions in Prestige Estates and Grodrej Properties that are beneficiaries of this.

The government’s commitment to upgrade India’s infrastructure is being accompanied by an uptick in industrial capital expenditure. That, too, is reflected in the portfolio.

There is also an ongoing boom in the take up of financial services products that is being enabled by digitalisation – this is why ANII’s two-largest positions are in banks, which in this market are growth stocks not value plays.

Nothing rises in a straight line, but it does feel to me as though after some introspection, the long-term outlook for ANII is good. For those who like to hedge their bets, ANII comes with a conditional tender at a price close to NAV offer that kicks in if the trust fails to beat its benchmark over the five-year period ending 31 March 2027. We are already quite a way into that.

After a difficult start, the trust has made up lost ground. I hope that the recent good momentum is maintained, but either way, the trust’s 17% discount looks too wide.

James Carthew is head of research at QuotedData.

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