The Indian market is up 15.51 per cent year-to-date, partly propelled by pre-election optimism over the possible election of a purported markets-friendly prime minister, Narendra Modi.
Four top-rated First State funds have over a fifth of their entire portfolios in the country and have been pushed to the top of the performance tables after the large weightings had depressed returns last year.
The £741m First State Asia Pacific fund is up 5.53 per cent this year so far and the £6bn First State Asia Pacific Leaders fund 5.44 per cent, the best results for the generalist emerging Asia ex Japan funds.
The funds are seventh and eighth in the sector behind only a handful of funds focused on the ASEAN region or Australasia and have 22.3 per cent and 20.2 per cent respectively in India.
Performance of funds vs sector and index in 2014
Source: FE Analytics
The £255m First State Asia Pacific Sustainability fund has also produced top quartile returns, up 4.52 per cent this year with a weighting of 27.7 per cent to the country.
The £273m First State Global Emerging Markets Sustainability fund has 20.4 per cent in India and is also top quartile in its sector. The 4.09 per cent it has returned is the fifth-best result in the 77-fund sector.
Performance of fund versus sector and index in 2014
Source: FE Analytics
The Indian market has been cheered by the possible election of Narendra Modi, leader of the BJP party, as prime minister.
Modi is seen as the business-friendly candidate, having introduced market-friendly reforms in his home state of Gujarat since 2002.
He has promised to overhaul India’s complex labour laws and focus on basic developmental tasks such as providing 24 hour electricity to all areas and improving sanitation. He is expected to look at privatising the state banks as well.
Votes are still being counted in the election, but exit polls suggest Modi will win.
The country’s surge is a vindication for the First State team, led by FE Alpha manager Angus Tulloch, who increased their weighting to India last year as the market suffered.
Our data shows that the Indian market fell 8.78 per cent last year as the developed world indices surged ahead.
Performance of indices in 2013
Source: FE Analytics
Nevertheless, First State increased their position in India in October, saying they expected an improvement in the political weather.
“Experience tells us, however, that the political and economic outlook is darkest just before the dawn as necessity leads to positive action,” they wrote.
“Accordingly, we have been encouraged by the recent appointment of Raghuram Rajan as the governor of the Reserve Bank of India.”
“He has already illustrated his skill with measures to attract higher foreign exchange flows, and has provided a detailed outline for banking sector reforms.”
The team said that what attracted them to the country was the quality of the family-run companies they found in the nation.
“Together with long histories and outward looking cultures, we observe that the better family controlled groups are already successfully pursuing international ambitions,” they said.
Our data shows they have been well-rewarded for this contrarian position. All four funds have five FE crowns.
Pankaj Murarka, who runs India portfolios for Schroders, says that the country looks set for a period of sustained market growth in contrast to the boom and bust post 2009.
He notes that the central bank regime lauded by First State when they upped their stake remains a significantly positive factor for markets.
Performance of Indian equities since Jan 2008
Source: FE Analytics
“Five years ago, a large monetary and fiscal stimulus along with a sharp economic recovery in growth rates ensured a short-term rebound – while depressed crisis level valuations in equities also spurred sentiment,” Murarka said.
“That rebound was based far less on fundamentals and more on the abundance of easy money.”
“Now, a disciplined approach has been instilled by a hawkish central bank determined to tame inflation, a slower recovery and equity valuations around historical averages that mean the Indian market for investors should be viewed through a long-term lens.”
“On this basis, India as a structural, and more importantly a sustainable, growth story remains as attractive as ever.”
Murarka, who runs his portfolios on a bottom-up, fundamental-driven approach, says that there is still plenty of value left in the market for investors who have not yet participated as long sa they are selective as to sectors.
“If you look past the short-term election rhetoric, the rally in Indian equities has not been broad-based and has instead been focused in select sectors and companies,” he said.
“Valuations, on the whole, still remain reasonable and as we like to remind investors: India in 2014 is not the same as it was in 2009, when a short-term stimulus and a coordinated global response to the financial crisis delivered quick gains in Indian equities.”
“The current recovery in the Indian economy will be more protracted but bodes well for long-term investors focused on the quality of future growth in India.”
The market-cap to GDP ratio of 0.8 is well down on the 1.8 times reached in 2007 and not far from the lows of 2009, he says.
Real earnings growth is likely to recover in the next two years and with inflation coming down and growth picking up there should be a re-rating of the market, the manager adds.
