Despite the strong gains seen over the past 12 months, the new Indian government could have the ability to drive India’s economy further forward.
According to Jupiter’s Avinash Vazirani (pictured), the more stable political environment, lower oil price, looser monetary policy (where the money supply is expanded) and what he considers attractive company valuations when all the good news is considered could all drive the market higher from here.
India was one of the major surprise stories of 2014 as prime minister Narendra Modi’s election victory in May, with his pro-growth agenda, caused the country’s stock market to surge following years of disappointing returns.
It means that the MSCI India index, which tracks companies listed on India’s National Stock Exchange and the Bombay Stock Exchange, is up 47.18 per cent over the past 12 months beating the wider MSCI AC World index by which returned 20.96 per cent, according to data from FE Analytics.
Performance of indices over 1yr
Source: FE Analytics. Cumulative returns with income reinvested, bid-to-bid and rebased into sterling
When an area of the market delivers such strong gains over such a short period of time, investors may question whether there is much upside left or whether they should look to lock in their gains.
Added to this are worries that India’s longstanding problems, such as significant overpopulation, inadequate infrastructure and poverty, could cause investors to once again pull out of the country and look for perceived safe havens.
However, while Vazirani – manager of the Jupiter India fund – understands those concerns, he is expecting a continued rise in the Indian stock market as he believes that the economy will improve in the coming years.
“I can’t tell whether the market will go up or not over the next few months – no one can – but looking at company profits and the multiple factors which I think should drive the economy, I’m comfortable,” Vazirani (pictured) said.
“Are we finding what we think are good businesses that the market has valued correctly? The answer to that question is in my opinion yes.”
The manager points out that while the market may be up over one year, those returns were coming from a very low base.
“We don’t just look at the performance of India over a one-year time frame. 2014 was an excellent year but 2013 proved more challenging. Over three years [the performance of the Indian stock market] looks okay,” he explained.
Our data shows the MSCI India index is up 42.4 per cent over three years, which means it has underperformed the global equity index, the MSCI AC World index, over that time.
In 2013, the MSCI India index fell 5.62 per cent, according to FE Analytics.
Performance of indices over 3yrs
Source: FE Analytics. Cumulative returns with income reinvested, bid-to-bid and rebased into sterling
Of course, past returns are no guide to the future – when it comes to both underperformance and outperformance – but Vazirani believes there are a number of reasons why investors can be positive on India.
The first positive, according to the manager, is Modi’s election victory last year as it represented the first clear majority in the Indian government for more than 30 years and the first centre right government with a majority ever.
Not only should this help more bills to be passed, but Vazirani also notes that Modi’s pro-growth policies, such as the removal of subsidies, are proving very positive for the corporate sector.
The manager says that another promising development could be that, after mainly investing their savings in property and gold, domestic investors are now turning their attention back to the stock market as a result of the more encouraging political backdrop, which is likely to support the market in the future.
The next positive, however, is a more widespread event. Vazirani says the fall in the oil price should provide a huge boost for the economy as it will act as a ‘tax break’ for both businesses and consumers.
“Thirty-six per cent of India’s overall import bill is fuel* and so around a 40 per cent drop off has had a big impact. Put all of this together, and I think it’s not surprising the Indian market has had a strong run,” he said.
Our data shows the S&P GSCI Brent Crude Spot index, as a result of the shale gas revolution and OPEC’s decision to not step in and cut supply, is down 41.9 per cent over the last year, leaving the oil price at $53 per barrel at the time of writing.
Performance of index over 1yr
Source: FE Analytics. Cumulative returns with income reinvested, bid-to bid and rebased into sterling
Vazirani says the fall has had a number of positive knock-on effects, such as lower levels of inflation and a stronger rupee. The manager also says, because of that, the country’s central bank may be forced to loosen monetary policy further by cutting interest rates, which in turn should give the economy another helping hand.
“Interest rates in my opinion are still far too high despite the recent cut,” Vazirani said.
“The cut by 25 basis points to 7.5 per cent was not expected by the market but it didn’t surprise us. We believe that there is significant scope for rates to go down further, which should give the economy a further boost.”
Vazirani says he is “relaxed” about how far the Indian markets have risen, given the prospect on an improving economy, declining inflation and falling interest rates.
The manager says the outlook for the companies in the Indian market is also positive, as their profits are likely to be aided by the lower oil price.
While Vazirani says the MSCI India index looks relatively expensive compared to its historical average, he adds that he believes companies are deserving of their higher prices as they are working within a more progressive environment and have delivered good growth.
“When I look at the prices of companies they are currently about 10 per cent higher than the long-term average, but when you consider the quantity of good news that doesn’t feel excessive to me.”
He added: “Currently the market does appear to be expensive but where else are investors getting 8 per cent GDP growth with both inflation and interest rates coming down, and an upward shift in the economic cycle at the same time?”
Vazirani has managed the Jupiter India fund, which currently has 45% of its portfolio in medium and smaller-sized companies, since its launch in February 2008.
Between launch and 17 March 2015, it posted a 105.81 per cent return (bid-to-bid total return in sterling, net of fees), meaning that it has more than doubled the 42.34 per cent gain of its MSCI India benchmark over the same period, according to FE Analytics.
Jupiter India is also up compared to its benchmark over three and five years with respective returns of 52.35 per cent and 42.08 per cent, FE Analytics shows. It has also outperformed its benchmark in four out of the last six full calendar years since its launch.
Its ongoing charges figure (OCF) is 1.82 per cent.
Jupiter India Fund year on year % growth ending 28.02.15
| 28/02/2010 to 28/02/2011 | 28/02/2011 to 29/02/2012 | 29/02/2012 to 28/02/2013 | 28/02/2013 to 28/02/2014 | 28/02/2014 to 28/02/2015 | |
|---|---|---|---|---|---|
| Jupiter India |
2.62 | -4.18 | -0.72 | -13.04 | 66.84 |
Source: FE Analytics, bid to bid, net income reinvested to 28.02.2015.
Past performance is no guide to the future
Source: * Morgan Stanley, India Oil and Gas report, 2014
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