Why the battered Indian market is poised for a rebound
Recent actions taken by the country’s central bank have hit share prices, but JO Hambro’s Samir Mehta says they will “restore sanity for a beleaguered economy”.
Indian markets have finally turned the corner, according to emerging market manager Samir Mehta
, who believes improving investor sentiment and economic reform have pulled the region out of the wilderness.
Funds with an Indian focus have struggled of late, with all but one of the 14 in the IMA universe down more than 10 per cent over a two-year period.
However Mehta, manager of the JOHCM Asia Pacific ex Japan fund, believes recent government actions that hit the market so hard were necessary, and that the country is poised for a significant rebound.
"We currently have close to 20 per cent of our portfolio in India," he said. "It is our biggest overweight, our highest conviction, and I can see this number trend upwards by the end of the year."
"India has been experiencing rising interest rates, a falling currency and slowing credit, a potent combination to restore sanity for a beleaguered economy. The Reserve Bank of India’s actions have been painful but necessary, and we should witness the foundations of better-quality growth in India."
"In effect, we are back to the 1990s for India: scarce capital, expensive credit and a disguised 'Licence Raj' of political patronage for allocation of resources."
According to FE data, the MSCI India index has returned 497 per cent over the last decade, with the JPM JF India fund up another 80 percentage points.
Mehta thinks the last two years have been a mere blip and as a result has steadily increased his exposure over the summer.
Performance of fund vs indices over 2-yrs
Source: FE Analytics
The manager says recent reforms are another reason for optimism – a view shared by Swiss & Global’s Vincent Lagger.
The Indian government has pushed through legislation that increases the amount of foreign investment into broadcasting, aviation and multi-format retail, which Lagger thinks will boost the whole economy.
"With foreign multi-nationals such as Walmart or Carrefour entering the $450bn local retail market, [Manmohan] Singh's government reached a historical milestone in liberalising the Indian economy," said Lagger, who heads up the JB EF Chindonesia portfolio.
"The measure is expected to create millions of jobs, open new channels for farmers and boost ailing infrastructure projects across the country."
"It will also help to tame a stubbornly high inflation and reduce inefficiencies in a sector where millions of tiny 'mom and pop shops' still dominate the marketplace," he added.
The manager is less positive than Mehta in the shorter term, however, and maintains his neutral view on Indian equities.
"With attractive valuations still outweighed by a challenging economic cycle, we favour a balanced strategy when investing in India. However, recent developments have improved the outlook for the rupee and for a number of sectors which have been under heavy pressure," he finished.
David Cornell, managing director of Ocean Dial Advisers and manager of the India Capital Growth trust, thinks that while the reforms are positive, more needs to be done to address the growing fiscal deficit in the region.
"These changes have already had a positive effect, as the amount of foreign investor flow has picked up," he said.
"Since the start of September, there has been £4.1bn worth of foreign investment into India, which compares favourably to South Korea and Taiwan, which had £20m and £25.5m."
"[This is positive], but the government needs to push through further reforms. These are symbolic changes but the fiscal deficit needs to be addressed, as debt levels could reach 6 per cent of GDP. Public spending is too high and so further measures need to be implemented."
"We are expecting and the market is hoping that there is a continuation of announcements or else these economic reforms will run out of steam."
Aberdeen Emerging Markets
, the Aberdeen Asian Smaller Companies
trust and Templeton Emerging Markets Smaller Companies are among the highest-profile emerging market funds that are currently overweight India.