After a period of underperformance last year, the MSCI India index has rallied strongly, up 17.93 per cent year-to-date. Indian equity portfolios have raced ahead, dominating the top of the performance tables.
Year-to-date performance of index
Source: FE Analytics
The HSBC GIF Indian Equity fund has topped the tables, returning 32.89 per cent since the start of the year, followed by the GS India Equity portfolio and Matthews Asia India.
Source: FE Analytics
The real question is whether India’s reversal of fortune is the start of a strong and ongoing rally or just short-lived euphoria on the back of the country’s recent prime ministerial election, which saw challenger Narendra Modi sweep the polls with his economic reform-focused agenda.
Newton’s Jason Pidcock, who runs the five-crown rated Newton Asian Income fund, says he’s not ready to buy into India on the basis that valuations are too high. However, he does think the long term picture for the emerging country is rosier following the recent election.
“It could be that within a couple of years India is steadily growing at a faster pace than any other economy in the world,” he said.
“Medium and long term, the outlook for India does look better post the election, because Modi has become prime minister.”
“If he can enact the policies that he wants to, if he remains prime minister for long enough and is able to push things through, undoubtedly the outlook for India does look better. In the meantime there’s risk from the market of disappoint that reform isn’t able to be pushed through quickly enough. It does take a little while.”
“There has been quite a bit of euphoria in the Indian market. It did extremely well in May over the election. Valuations in the short term look pricy, however.”
“The political reform has to catch up with what the market is now already factoring in, but it is absolutely true that the potential growth rate of India has improved.” Pidcock (pictured) says he’s keeping a lookout for Indian stocks to add to the portfolio, but he’s waiting for a shot-term pullback and better yields from companies in India to buy in.
Ajay Argal, manager of the $19.1m Baring India fund, says the recent rally could be the beginning of something far more significant – something that hinges on India getting its economic growth in gear.
“[Over the last few years] the slowdown came because the previous government was not making any decisions,” he said. “That’s changing now.”
“There were a lot of issues with making decisions because of corruption and scandals, so they did not have the moral authority.”
“India has too many safeguards and this is why we don’t’ have the growth of China. If you decide something in China, it gets done. If you decide something in India then 100 people have 100 different opinions.”
However, Argal says as long as Modi is able to implement his economic changes – which he points out are already happening – then the country will see a gradual pickup in GDP growth, in turn ramping up equity returns, particularly for cyclical sectors.
“Modi is known for his execution skills. He is focused on getting things done. We think he’ll be able to do the things previous governments over the last 10 to 15 years have not been able to do,” he explained.
“The ministries are already being run like private sectors. They have targets and monthly reviews of what’s happening.”
Though he doesn’t think India will return to previous high levels of economic growth anytime soon, he thinks GDP growth will hit 5.5 per cent this year and rise to 6 per cent next year.
“It needs some time, but it will have an impact two to three years down the line,” he said.
The manager adds that he doesn’t expect inflation to fall as India has always been an inflation-plagued country, but he says 7 to 8 per cent inflation is “manageable”.
Argal says the outlook for companies in light of all the expected economic reforms is rosier than ever, and points out earnings revisions in India are among the best in emerging markets.
In terms of valuations, the manager thinks equities have a long way to run.
“We’re still at average valuations,” he said. “High valuations are a long way to go.”
He is finding the most value in cyclical companies like financials and industrials, as well as mid-caps more generally, which he says are cheap compared to large caps. Defensive companies on the other hand, are expensive according to the manager.
“Mid-caps are trading at an average discount to large caps, so there’s a lot of way to go there,” Argal said. “Our focus is to actively search for ideas that are [not in the] index because that’s where we think we can add value.”
The Baring India fund, which launched in December 2011, has benefitted from the recent “Modi mania” and is the fifth best performing portfolio in the IMA universe in 2014.
Performance of fund vs sector and index since launch
Source: FE Analytics
It is also well ahead of its MSCI India 10/40 benchmark over the last 12 months, with returns of 29.39 per cent.
