A stock picker’s paradise

11 April marks the start of the Indian general election where an estimated 900 million voters will go to the polls for the largest general election in the world with the results announced on 23 May. With a population of 1.3 billion and a growing middle class there are many reasons to be optimistic about the prospects for India. How are investment company managers viewing opportunities in the country ahead of the general election?

The Association of Investment Companies (AIC) has spoken to the managers of India-focused investment companies about the impact of the election, which Indian sectors present attractive opportunities, what makes India unique amongst emerging markets and the outlook for India.

General election – momentum for Modi but volatility expected

Rukhshad Shroff, Fund Manager of JPMorgan Indian Investment Trust, said: “As India’s rambunctious electorate gears up to participate in what, famously, is the world’s largest general election, investors will be expecting a degree of volatility within India’s equity market in the coming months. In terms of external factors, India is one of the Asian countries least exposed to trade friction between China and the US. So, while Indian equities can be affected by jitters in the global economy, earnings are substantially shielded from this type of nervousness. Indian revenues and earnings are instead much more affected by domestic factors, like the forthcoming election. However, investors will have the opportunity to remind themselves that the best companies often gain market share in challenging environments.”

David Cornell, Chief Investment Officer of Ocean Dial Asset Management, the Manager of India Capital Growth, said: “Despite recent polls showing a rally in support for Narendra Modi’s Bharatiya Janata Party, predicting the outcome of Indian elections is a challenging task. Whilst victory for Modi would boost sentiment, the government’s structural reforms are unlikely to be reversed should he fail to be re-elected. The Insolvency and Bankruptcy Code, Goods and Services Tax, and the Real Estate Regulation and Development Act are his headline achievements and will be instrumental in taking the country’s economic development to the next level. Nevertheless, incremental reforms will be hamstrung if neither main party polls strongly in May, thereby leading to the formation of a fractured coalition of disparate regional parties.”

Kristy Fong, Manager of Aberdeen New India Investment Trust, said: “Latest opinion polls appear to signal growing momentum for a Modi victory. This would mean a continuation of his structural reform agenda which would be positive for markets, but elections are rarely smooth so we anticipate volatility. Market weakness based on noise, not fundamentals, will enable us to invest in good-quality companies at more favourable prices. We prefer sticking to what we know best – finding and investing in companies with pricing power and robust balance sheets which are well run.”

Attractive opportunities – private sector banks, building materials and IT

Kristy Fong, Manager of Aberdeen New India Investment Trust, said: “We see a huge opportunity to invest in companies that sell to Indian consumers. Infrastructure development and affordable housing, combined with tax and interest rate cuts, would also benefit real estate and materials companies. We also like private sector banks, which are better capitalised than public sector peers and less burdened by bad loans. More generally, India has fostered strong IT and engineering skills, which feeds well into the digitalisation trend we see globally.”

David Cornell, Chief Investment Officer of Ocean Dial Asset Management, the Manager of India Capital Growth, said: “As the government is under pressure to increase expenditure on infrastructure, we have seen some exciting opportunities in cement and industrials. Companies operating in these areas offer stronger balance sheets than are often found when investing directly into infrastructure and will continue to benefit as improvements are made to India’s networks and housing. Private sector banks also form an important part of our portfolio. Better pricing power has put them in a strong position whilst public sector banks have felt the squeeze as deposit growth lags behind credit growth.”

Rukhshad Shroff, Fund Manager of JPMorgan Indian Investment Trust, said: “We seek to invest in companies which have good long-term growth prospects and management teams that combine a strong ability to execute with robust corporate governance. For example, we’ve had a long-term overweight position in private sector banks. The market for financial products is growing and the private sector is gaining share at the expense of public sector banks, which are less well managed and less well capitalised. That said, an important and positive development is the long-awaited repair in the banking sector which is now well and truly under way.”

What makes India unique amongst emerging markets?

Prashant Khemka, Founder of White Oak Capital Management, the Investment Adviser to Ashoka India Equity, said: “Distinct from the fact that the Indian equity market offers a rich underlying business mix, the fact that India is a long-established and well-functioning democracy makes it a superior investment destination among emerging markets. As in developed markets, India’s mature democratic institutions and rule of law grant meaningful rights to even foreign minority shareholders. These shareholders have the right to sue  government organisations whenever they are on the wrong side of the law – something no investor may dare think of in most authoritarian emerging markets.”

David Cornell, Chief Investment Officer of Ocean Dial Asset Management, the Manager of India Capital Growth, said: “India has a large population with a low dependency ratio, but key to maintaining growth will be cultivating skilled labour. Recently it has welcomed a reverse ‘brain drain’ as young professionals educated or working abroad are moving back home. Management is also very strong, demonstrated by the US’s Fortune 500 where, of 75 foreign CEOs, 10 are from India, far exceeding other emerging markets. This is reflected in the performance of India’s domestic institutions, with three of its business schools now ranked amongst the top 50 in the world.

“Most importantly, this journey is reflected in the Indian equity market which has compounded in US dollars at 12.8% over the last 10 years, compared with 3.1% in China and 2.8% in Mexico. Over longer periods its returns are equally strong, demonstrating its ability to perform well irrespective of the political environment. Beyond the size of the opportunity, this superior performance is in part driven by the country offering numerous high-quality investment opportunities across a broader range of sectors in comparison to its emerging market peer group. It is a stock picker’s paradise and our outlook is turning increasingly positive. A volatile 2018 saw valuations in small and mid-cap stocks return to more reasonable levels and an earnings recovery is on the horizon. Global macroeconomic uncertainty and election noise will continue to open up attractively priced opportunities for patient long-term investors who are finding it increasingly difficult to ignore India.”

Outlook for India: earnings growth expected to “catapult”

Kristy Fong, Manager of Aberdeen New India Investment Trust, said: “India’s large, domestic economy is in a good position to withstand external shocks. Consumption growth remains compelling, underpinned by a young population and an expanding middle class. Companies with pricing power and robust balance sheets will be well placed to prosper, such as Hindustan Unilever. We are confident in our holdings, which are all quality companies with solid fundamentals run by experienced management teams.”

Prashant Khemka, Founder of White Oak Capital Management, the Investment Adviser to Ashoka India Equity, said: “With India’s earnings growth expected to catapult to over 20%, the Indian stock market offers many attractive investment opportunities in our view.  We continue to find well-managed, scalable businesses offering superior returns on capital at appealing valuations.”

Rukhshad Shroff, Fund Manager of JPMorgan Indian Investment Trust, said: “The growth potential remains strong in India for banking and consumer products as Indians accumulate more wealth and more spending power. The question is how to benefit from this. India is notable for having a number of very high-quality private sector listed companies which will be able to capitalise on these trends. Long-term investors know that the opportunity in India is a very compelling one. In a growth market like India, companies which may appear expensive at first can justify those valuations over time as earnings increase rapidly. That said we are, of course, extremely discerning stock pickers.”

David Cornell, Chief Investment Officer of Ocean Dial Asset Management, the Manager of India Capital Growth, said: “Even with short-term uncertainty surrounding the election, India has built a strong case as a standalone investment destination. It is the fastest growing major economy, with GDP set to double every six years, whilst the implementation of an inflation-targeting regime in 2013 has helped inflation levels structurally fall. India’s five-year inflation average is below the emerging market average for the same period.”

Investment companies with the highest exposure to India

Source: AIC/Morningstar

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Notes

1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 358 members and the industry has total assets of approximately £184 billion.
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