Skip to the content

Time to sell last year’s best market, warns Martin Currie

18 February 2015

India’s stock market has made remarkable gains over the past year but Martin Currie’s Andrew Graham says it won’t last.

By Daniel Lanyon,

Reporter, FE Trustnet

The recent dominance of Indian stocks in emerging markets won’t last following a divergence between valuations and fundamentals, according to Martin Currie’s Andrew Graham.

Indian equities rocketed up in 2014 as increasingly positive investor sentiment flowed towards the country after the election victory of the pro-business reformist Narendra Modi in March. 

Voters handed Modi a landslide victory, after he promised the country a series of reforms mostly aimed at stimulating its economy and tackling corruption. He pledged to restructure a multitude of protectionist and tax policies that have stymied the flow of foreign capital into the country over the past decade. 

As a consequence, the MSCI India index was the standout performer in both developed and emerging markets last year, having gained 31.58 per cent. The next best performer of the major indices was the S&P 500, which gained 20 per cent. Meanwhile, the MSCI Emerging Markets index made just a 3.9 per cent gain.

The Indian market has continued to rally in 2015 bringing its total gains to more than 50 per cent over the past year.

Performance of index over 1yr

Source: FE Analytics

 
But Graham, whose remit includes the Martin Currie Pacific Trust and open-ended Martin Currie Asia Pacific fund, says investors may wish to shift away from Indian exposure to avoid a sell-off in the near term.

“Everybody loves [India]. 18 months ago there were huge discounts available in stocks relative to their long-term averages but nobody was interested,” he said.

“Now, I see a lot of quite cyclical businesses in India to me that are no better than Chinese companies and are trading on many, many times multiples while their Chinese counterparts are not.”

“There is nothing wrong with Indian companies but there are very serious questions about valuations. The underlying change is for real but a lot of the really positive changes going on there are not really going to appear as economic growth or corporate profit growth – maybe later on but it is going to take time to come through. You’re not going to flick a switch and it will happen.”

While Graham still has some exposure to India through Tata – the largest listed Indian company – he has sold out of a major Indian position in the Martin Currie Pacific Trust believing it to be too expensive.

“We just sold Hindustan Unilever. It has great business, great managers and all that, but to own that company today you have to believe that high growth and elevated margins will exist for a very long period of time.”

The manager says part of Indian stocks’ re-rating has been from a dearth of opportunity elsewhere in emerging markets, which has prompted large flows to the country. However, he warns that the same trend could be swiftly reversed in the near term.


“Emerging market managers overweight to India are now at an all-time high. They don't like Russia and they certainly don't like Latin America either so they are really keen on India. But what if China starts to stabilise, the Chinese government starts to ease policy a bit more aggressively or its property starts to recover a bit more than people expect - are you going to sit there with your massive underweight or try and close the gap?” he asked.

“They are not going to fund that from massive underweight in Russia or Latin America. There is only one big liquid asset in emerging markets – which is India and is trading at close to an all-time high, in terms of valuations.”

In the past six months, the MSCI China index has made some progress but the likes of Brazil and Russia have seen a torrid plunge in their respective indices.

Performance of indices over 6 months

Source: FE Analytics

Craig Botham, emerging markets economist at Schroders, says while Modi still garners popular support there is evidence of a faltering of the premier’s initial inertia.

“There remains strong belief in the ability of prime minister Modi to push through needed reforms, but it was not difficult to detect a hint of frustration in some quarters at the lack of progress on this front,” he said.

“Nonetheless, it is still expected that progress will be forthcoming. There seems little denying though that even absent ‘big bang’ reforms, things are improving in India.”

“Expectations have moderated from their May 2014 highs, to be replaced with a more realistic if less inspiring mantra: gradualism works.”

 However Botham adds that reforms are being delayed, in part, by the lack of a ruling party majority in the upper house of parliament, preventing the successful passage of key reforming bills.


“Prospects for corporate capital expenditure, and hence growth, are also limited by low capacity utilisation – currently around 65 per cent; a problem only economic growth can address. In general, the repeated refrain was that India has seen a qualitative but not quantitative change and that things must change ‘on the ground’ before investment will revive.”

The economist says a key event will be the market’s reaction to annual budget, expected to be announced on 28 February.

Funds

Managers

Andrew Graham

Groups

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.