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Why this manager is seeing a rush of positive change in India

30 March 2015

A rejuvenated Indian economy has left many investors feeling more positive than ever about the country, according to Jupiter’s Avinash Vazirani.

By Lauren Mason,

Reporter, FE Trustnet


Before 2014, a slowing economy, a weak external environment and a decade of scandals were significantly damaging the Indian market.  

However, in May last year sentiment towards the emerging market turned positive following Narendra Modi’s landslide election victory, which was also the first time a party has won an absolute majority in the country for 30 years.

The new pro-business prime minister boosted confidence after promising to reform the economy and this was reflected in the sharp jump in the Indian stock market shortly after he was elected.

Performance of the MSCI India index over 3yrs

 

Source: FE Analytics, cumulative total return bid-bid over 1 year, rebased into sterling

However, could the market have over-reacted to the pledges made by Modi? Avinash Vazirani, manager of the Jupiter India fund, doesn’t seem to think so and believes more good news could come out of India.

“I’ve been investing in India for more than 20 years,” he said. “I haven’t seen as much change in such a short space of time in my lifetime and I’m positive about these changes.”

“All of these changes have happened over the past seven or eight months. There’s been a lot of talk about reforms but it’s all about the execution and the early signs look very good.”

The rapid uptick in the Indian stock market has led to some areas looking expensive as investors rushed back to the country, but Vazirani is still finding companies where in his opinion there’s the prospect of further gains.

He said: “There are areas where the prices of companies are overvalued in my opinion. One such company’s share price rose by 22 per cent in January even though its profits were significantly below the market’s expectations. However, are we finding what we think are good businesses that are priced correctly? The answer to that question is yes.”


“Not only that, but it’s the first centre-right government with a majority ever, which can have big implications for business. We’ve already seen the business climate change with a removal of subsidies proving very positive. When you haven’t got a majority it’s very difficult to get any legislation through and we’ve seen that for many years in India.”

Vazirani highlights the government’s radical biometric identification programme, which will remain firmly in place after the election hype dies down, as an argument for investing in India.

Avinash considers this programme signifies a huge technological leap that has never been attempted anywhere else in the world. People from all backgrounds and areas of the country will be enrolled into an online system where their identities can be verified in moments.

Vazirani explained: “We think this is about to become a big driver for the economy.”

“There was a big push into opening new bank accounts recently, with 135 million bank accounts opened over a four-month period. A recent announcement by the Ministry of Finance has confirmed that 99.7 per cent of households will be able to have a bank account.”

The priority for India now is to ensure that holders of bank accounts are linked to the biometric ID cards. According to Vazirani, this would enable the government to pay direct benefits transfers to those who qualify for it, which should be implemented within the next 12 to 18 months.

He said: “The benefits seem to be huge. It should improve the spending power of a big bulk of the population and reduce the wall of money operating in the black market.”

“It should also improve corporate governance, which is a big theme in India at the moment. All central government employees now have to log in whenever they work, which tells authorities people are at their desks when they are supposed to be.”

“India hasn’t had this kind of transparency before. If you’d told me when Modi came in that this would have happened, I wouldn’t have believed you.”

 Aiming to benefit from these changes, the Jupiter India Fund has increased its exposure to companies whose main market is India, over those that are export-led.

The decision was made because domestic companies were available for a cheaper price while the manager believes that their business activities should improve as a result of the government changes.

In light of this, the team have invested in banks – financials was the largest sector weighting at 25.7 per cent of the portfolio, as at 28 February 2015.


“Better governance has also had a big impact on public sector companies that are effectively controlled by the government,” Vazirani said.

“We think the low prices that these companies are trading at are simply not justified in the current environment. We have much more confidence in their ability to grow now.”

He points out that share prices of “some Indian public sector banks are currently cheaper than some of the Greek banks out there. For me that is totally unjustified,” the manager said.

The manager explained that many of these banks are sitting on huge amounts of government bonds, which can make up 29 per cent of their assets in some cases. If the central bank lowers interest rates, as he expects it will, the banks could potentially make a lot of profits on their bond portfolios.

Vazirani said:  “We also hold shares in one of India’s largest petrol and diesel retailers, which is majority owned by the government. The government has removed subsidies on petrol and diesel.”

“At the moment the market doesn’t seem to believe that such a radical move could possibly have happened, but we’re seeing prices going up and gradually I think we’ll see the market realise this is a genuine story.”


Important Information:

The value of investments and the income from them can fall as well as rise and may be affected by exchange rate variations, you may get back less than originally invested. 

This commentary is for informational purposes only and is not investment advice. The commentary above represent the views of the fund manager at the time of preparation and may be subject to change. They are not necessarily those of Jupiter as a group and readers should be aware that they should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided, but no assurances or warranties are given.

The Jupiter India Fund will be investing in a single geographic area which is in the course of development and therefore is an area at greater risk of volatility. Fees and expenses are generally higher in emerging markets than they are in western markets. Returns may also be affected by changing political, regulatory and fiscal measures which may change and potential investors are particularly advised to read the specific risks applicable to this Fund which are contained in the Key Investor Information Document (KIID). The KIID, Supplementary Information Document (SID) and Scheme Particulars are available from Jupiter on request.

Jupiter Asset Management Limited (JAM) and Jupiter Unit Trust Managers Limited (JUTM) are authorised and regulated by the Financial Conduct Authority and their registered address is 1 Grosvenor Place, London SW1X 7JJ. JAM and JUTM are subsidiaries of Jupiter Fund Management Plc and the group is collectively known as “Jupiter”.

No part of this commentary may be reproduced in any manner without the prior permission of JAM and/or JUTM.

This content is sponsored by Jupiter Unit Trust Managers.

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