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Why Aberdeen thinks India will surpass China for growth

06 August 2014

Aberdeen’s Anne Richards says that while the previous decade’s economic growth belonged to China, the next will belong to India.

By Daniel Lanyon,

Reporter, FE Trustnet

India is set to replace China as the big growth engine of emerging markets over the next 10 years, according to Anne Richards, chief investment officer at Aberdeen.

Following the election of prime minister Narendra Modi on a pro-business agenda in March, the Indian stock market has rallied and come back to the attention of investors after several years of shaky performance.

Since the beginning of the year the MSCI India has soared more than 20 per cent compared to the MSCI China which is up just 5.5 per cent.

Performance of indices in 2014


Source: FE Analytics

While the Indian stock market is a little frothy following a change in sentiment after the election, the long-term investment case remains rooted in India’s demographics, Richards says.

ALT_TAG "There has been a lot of hype post the election and markets have rallied enormously, but we are instinctive ‘likers’ of India, although we think it has gone a bit over hyped in the short term," Richards (pictured) said.

"There is a lot resting on Modi and what he can actually deliver but India has demographics very much in its favour. That is the difference between India and China where the demographics are going the wrong way, in a similar way to Japan."

Richards says despite the growth of the Indian and Chinese economies, the performance of equity markets will not always be correlated.

"For us, that longer-term underpinning - helped enormously by demographics - is an unstoppable trend and it is going to carry on.”

“However, that is not to say that markets will always match the economic performance - we know there is a lot of debate about the correlation between markets and [economic] growth.”

Both India and China have made huge - almost identical - gains in equity markets over the past 10 years with the MSCI India up 324.76 per cent and the MSCI China up 323.61 per cent.

Performance of indices over 10yrs


Source: FE Analytics

However, the Chinese economy has consistently grown more rapidly than India over this period, despite a recent slowdown.

The MSCI India has tended to stay ahead of the MSCI China over this period but also sell off more rapidly during down market periods.

For example, during the financial crisis both markets bottomed out in 2008 with a fall of approximately 61 per cent but this occurred over less than 10 months in the Indian market compared to a year for the Chinese market.

Eight funds in the Aberdeen portfolio have significant exposure to India.

All eight funds have a higher weighting to India than China, according to FE Analytics, although this includes the $5bn Aberdeen Global Indian Equity fund, which by virtue of its remit is almost fully invested in Indian equities.

The Aberdeen Emerging Markets Equity fund has 13.37 per cent exposure to India while the Aberdeen Asian Smaller Companies fund has 11.2 per cent and Aberdeen Global Emerging Markets Equity and Aberdeen Global Emerging Markets Smaller Companies funds have 13.3 and 9.8 per cent, respectively.

The Aberdeen Asia Pacific & Japan Equity, Aberdeen Asia Pacific Equity and Aberdeen Global Asia Pacific Equity funds all hold Aberdeen Global Indian Equity as their largest or second largest holding, giving the three funds over half their exposure to India.

Since the Aberdeen Global Indian Equity fund was launched in March 2006 it has returned 117.68 per cent compared to a gain of 83.66 per cent in the MSCI India index.

Performance of fund and index since Mar 2006


Source: FE Analytics

The fund has also stayed ahead of the index in 2014 as the market has more generally rallied.

Ben Willis, head of research at Whitechurch Securities, says the Indian market tends to be dominated by a few large companies and so recommends buying actively managed exposure rather than a tracker or exchange traded fund.

“The way we access it is through the Aberdeen New India Investment Trust. We did hold the First State Indian Subcontinent fund as well but that is now closed to new money,” he said.

“If investors are reticent about buying into India directly, there are a number of Asia Pacific managers who are heavily weighted to the market, for example the First State Asia Pacific Leaders fund.”

“Obviously the election has had a massive impact on the desirability for Indian equities but it is a market where you have to take a long-term view because of its volatility.”

The Aberdeen New India Investment Trust is currently trading on a discount of 11.4 per cent, has no gearing and an ongoing charge of 1.61 per cent.

Matt Linsey, manager of the GAM Star North of South EM Equity fund, is bullish on the case for Indian equities in the wake of the recent election.

“India has seen the unprecedented victory of Narendra Modi, a man elected by a wide cross-section of society on the basis of his reform programme, rather than family background, caste or religion,” he said.

“This has transformative potential for the country, the economy and the stock market. Because many of India’s problems are self-inflicted, a reform-oriented government with a strong mandate may resolve them.”

Linsey says Modi’s pledge to implement policies such as cutting fuel subsidies will resolve budget deficit problems while returning profitability and growth to energy companies.

“By cutting red tape, much needed investment in infrastructure can resume. State controlled enterprises will be run professionally, aiming for profit and growth rather than satisfying political objectives.”

“With sensible policies, the high cost of capital should fall. The profitability of India’s corporate sector should increase dramatically as a result, more than justifying the current market rally.”

But Chris Wise, investment director for Gemmell Financial Services, says that while exposure to India is increasingly attractive, he recommends investors use a more general emerging market fund with a bias to the Indian equity market.

“There is a lot of potential but by holding a direct fund you are adding a lot of risk and volatility to a portfolio for that region,” he said.

“This may change in the future, particular as there is an expectation for lots more fund launches concentrated on the Indian market, or with a greater bias to India.”

“At the moment we are taking a more defensive positions in the space. If you want to take more risk in this area you have to change your views in other areas you have exposure to due to their high beta risk.”

Emerging markets more generally have been one of the most out of favour asset classes over the past few years, particularly in the aftermath of the ‘taper tantrum’ when emerging markets sold off after the Fed hinted it would gradually end its monetary stimulus.

Though Richards is sanguine on the long-term case for the asset class, she says the next 10 years will see an increasing differentiation between emerging market countries from investors at both an institutional and private level.

“We see all of the growth and interesting innovation and development now coming out of other parts of the world apart from the western world.”

“We are already seeing big powerful companies out of Asia emerge to be global brand leaders. It is not just the US or UK that can produce the big global companies anymore, that just not the way the world is.”


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