India has the best macroeconomic backdrop out of any major economy, according to Prashant Khemka, chief executive of emerging market equities at Goldman Sachs Asset Management. 
Global equity investors seemingly face a difficult decision in the current environment as after a prolonged rally, valuations look unappealing in many developed markets while most emerging market equities are heavily reliant on China’s future growth.
However, while it has become a relatively consensual trade, many argue that investors should be focusing on India within their portfolios.
Thanks to its very favourable demographics and a now pro-businesses government led by prime minister Narendra Modi, the MSCI India index has risen 49.06 per cent over three years, outpacing the MSCI AC World index’s gains by 7 percentage points in the process.
Performance of indices over 3yrs
Source: FE Analytics
While Khemka – who runs the five crown-rated GS Emerging Markets Equity Portfolio among others – tends to focus on bottom-up stock selection, he says it is little surprise he and the team are finding a large number of investment opportunities in the region.
Indeed, he thinks India’s strong equity market returns are only going to continue.
“While we don’t tend to focus too much on the macro, we think India has the strongest macroeconomic backdrop of any country at this point in time,” Khemka said.
FE Trustnet has written about the growing popularity of Indian equities on a number of occasions, with the likes of Neptune’s Kunal Desai arguing that the country’s bull market isn’t going to end any time soon.
Khemka, whose GS Emerging Markets Equity Portfolio has more than doubled the MSCI Emerging Markets index over three years, says there are a combination of factors driving India’s relative attractiveness.
“It has a domestically-orientated economy so hasn’t been negatively affected by the collapse in commodity prices. It is also a net beneficiary of China’s growth slowdown as it is less-linked to the Chinese economy than most emerging markets.”
Khemka believes the pro-businesses and reformist government sets a good backdrop for India, which combined with a better monsoon season, should benefit corporate earnings.
Indeed, while corporate earnings have been growing at the mid-single-digit growth level over recent years, he says these combination of factors should drive earnings growth towards the mid-teens over the coming years.
He added: “There are very few places in the world where you can find that sort of earnings growth.”
So, how can UK investors gain access to India’s potential growth story?
All in all, there are 18 funds in the Investment Association universe which solely concentrate on Indian equities.
Given the sheer scale of the rally in Indian equities over recent times, it may come as little surprise that all India funds that have along track records are among the 30 best performing portfolios in the IA Specialist sector over three years.
Best performing India funds over 3yrs
Source: FE Analytics
The best performer over that time has been GS India Equity Portfolio, which is managed by Khemka and his team. The fund has made a hefty 121.83 per cent over three years, more than doubling the returns of its benchmark.
Other top-performing India funds over that time include Jupiter India, with its clear mid and small-cap bias, Invesco India Equity and Matthews Asia India.
However, on average, India funds have tended to deliver a much higher annualised volatility and maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – than global equities over that time.
Those funds which have given investors the smoothest return over that time, though, include FE Alpha Manager David Gait’s five crown-rated Stewart Investors Indian Subcontinent portfolio. Not only has it considerably outperformed the index over three years, it has had the best risk-adjusted returns (as measured by its Sharpe ratio) out of all the India funds on offer.
The fund is run using a quality growth approach and has been one of the best performers in its sub-sector over the longer term as a result, having beaten the MSCI India index in each of the last seven calendar years.
Of course, many investors may not have enough room in their portfolio for a designated India fund.
As mentioned earlier, Indian equities have been a relatively consensual trade so investors have numerous options if they are looking for broader emerging market funds taking big bets on the region.
In the IA Global Emerging Markets sector, for example, 58 per cent of funds are overweight India (relative to the MSCI Emerging Markets index) while 16 per cent have a double overweight position.
IA Global Emerging Markets funds with the highest weighting to India and 3yr returns
Source: FE Analytics
The funds with the highest weighting to the country are Newton Global Emerging Markets (30.36 per cent), F&C Emerging Markets (29.60 per cent) and Neptune Emerging Markets (27.50 per cent).
Taking big best on India seems to have helped these funds. Of the 10 funds with the highest weighting, all but on are outperforming the sector and index on a three-year view.
There are fewer funds in the IA Asia Pacific ex Japan sector that are as bullish on the country, though.
According to FE Analytics, for example, some 43.8 per cent of the peer group is currently overweight India (relative to the MSCI AC Asia Pacific ex Japan index) and only 11.2 per cent are running double overweights.
IA Asia Pac ex Japan funds with the highest weighting to India and 3yr returns
Source: FE Analytics
Nevertheless, the 10 funds with the biggest allocations to India in the sector – a list that includes Veritas Asian, Stewart Investors Asia Pacific Leaders and Baillie Gifford Pacific – are all first or second quartile performers and ahead of the index over three years.
