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Greenberg: I’m overweight India but not betting on Modi stocks

01 October 2014

Hermes' head of emerging markets thinks the booming country is looking expensive in sectors expected to benefit from reforms from the recently elected Narendra Modi.

By Daniel Lanyon,

Reporter, FE Trustnet

Indian stocks bought in anticipation of reforms by Narendra Modi are now overvalued, according to Gary Greenberg, head of emerging markets at Hermes.

The MSCI India index has been the standout performer in both developed and emerging markets this year. While conditions have been fairly flat in developed markets, India has gained 27.41 per cent.

The second best performance was in the S&P 500, which gained 10.18 per cent.

Performance of indices in 2014


Source: FE Analytics

Most of the top performing funds in the IMA universe over the past three months have been specialist India funds, as a recent article from FE Trustnet highlighted.

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

But Greenberg, who is lead manager of the £300m Hermes Global Emerging Markets fund, says stocks that look set to benefit from the raft of business and economic reforms that Modi’s newly elected government have pledged to implement are looking expensive.

“India equities are fairly valued overall – neutral to the long-term mean - but within that the Modi stocks – infrastructure related and industrial – are pretty overvalued.”

“They are trading on the hope that major secular transformation takes place over the next year or two. However, Modi’s political power is constrained, he has six or seven states behind him but the rest will take some persuading.”

“While we have an overweight we are not betting on that. Our portfolio is full of non-Modi stocks such as Power Grid, all high quality, all weather companies.”

Sam Vecht, manager of the BlackRock Strategic Funds Emerging Markets Absolute Return fund, disagrees and is bullish on Indian stocks over the longer term and on Modi’s ability to reform the famously sluggish bureaucracy.

“Narendra Modi swept to victory on a record of successful reforms implemented as governor of Gujarat. He will meet opposition in the form of India’s legendary bureaucracy but we believe that Modi has the ability to overcome the stasis that has limited India’s potential for so long,” he said.

“Expanding from a low base, connecting poor rural Indians to the financial sector in a country with a strong entrepreneurial culture makes India our top pick of emerging markets over the next five years.”

Greenberg’s Hermes Global Emerging Markets fund has an overweight positon in Indian equities with names such as Tech Mahindra and Power Grid India in its top 10.

The fund has performed strongly over the past six months and is top decile over this period, buoyed by its India exposure.

It has also outperformed since launch and has returned 15.91 per cent – the sixth best performance in the IMA Global Emerging Markets sector over this period. By comparison the average fund in the sector returned 3.75 per cent and the MSCI Emerging Markets index gained 4.36 per cent.

Performance of fund, sector and index since Nov 2012


Source: FE Analytics

It has also fared well since a sell-off hit emerging markets in May 2013.

Investors rushed for the door when the Fed began hinting it would look at tapering its monthly stimulus programme and normalise interest rates.

The fund is now less than half a percentage point from its level before the sell-off, the seventh best performance in the sector, where the average fund is down 8.598 per cent.

Performance of fund and sector since 22 May 2013


Source: FE Analytics

Greenberg says he thinks sell-offs will become less of a feature in the asset class as it goes through a “transformation” with economies becoming less focused on exporting.

“I think that is saying a lot, but it is true already to some extent. The external accounts of emerging market countries are much better than they were in previous crises,” he said.

“They have much higher foreign exchange reserves and a lot of their debt is now in local currency and so they don’t have the same amount of vulnerability they once had. They have learnt from previous lessons.”

“The old order, both globally and for emerging markets, is definitely over and we all know that. The low cost manufacturing and exporting to the developed market consumers who are taking on more and more debt is definitely over.”

He says emerging market policymakers have been working toward a new model whereby their countries finds a better competitive advantage in the global economy than an export-led model.

“If executed well it could result in a sustainable path of economic growth that could in turn transform the boom/bust process – which they have all been going through – into investments rather than trades.”


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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.