Investors shouldn’t be discouraged from buying Indian equities because of high valuations and the time it is taking for prime minister Modi to push his reforms through, according to Ashburton’s Jonathan Schiessl (pictured). 
However, he warns investors to keep an eye on the supply/demand unbalance in the country, which he says can be overlooked by investors.
India was the darling emerging market of 2014, following the election of pro-reform prime minister Narendra Modi. During those 12 months, the MSCI India index returned 31.58 per cent while the MSCI Emerging Markets index – dragged down by struggling Brazilian and Russian equities – returned just 3.9 per cent.
This all changed, however, as investors grew impatient for Modi’s economic reforms to push through and as rising commodity prices bolstered stocks based in oil-importing emerging market countries.
In 2016, the Brazilian and Russian MSCI indices returned a respective 98.29 and 84.67 per cent, while MSCI India was left trailing in the dust with a 17.57 per cent return.
Performance of indices in 2016
Source: FE Analytics
“2016 was all about Russia and Brazil, the commodity-led emerging markets. They were so unloved, nobody owned them and then they gave huge returns. So India has quite frankly disappointed over the last two years,” Scheissl said.
“Forget 2017, for the last two years India has been a laggard and, after Modi was elected, India went from being a dog of a market to being a firm foreign favourite. Then in 2015, investors started to become disenchanted.”
Modi achieved a landslide victory in India’s 2014 general election after promising to implement a series of drastic economic reforms. These included a focus on corporate governance, allowing 50 per cent more foreign investment across varying sectors and deregulating the price of natural gas, kerosene and fertiliser pricing in a bid to encourage the expansion of private production.
However, many industry commentators have voiced concerns as to how long these reforms seem to be taking.
Schiessl, who also co-runs the four crown-rated Ashburton India Equity Opportunities fund, says investors simply need to be patient and retain a long-term investment view.
“Moving away from positioning and focusing on expectations, people get fed up and people think, ‘this guy built up expectations in terms of what he could deliver’, but he always said it was at least a two-term job, if not three,” the manager reasoned.
“Even now Modi is talking about 2024 when the next election is 2019. His vision is that he needs 15 years to pull India up by the scruff of the neck and reform it to deliver growth.
“His agenda is not pro-business, it’s actually to pull people up from the floor and make a difference to their everyday lives.
“He understands that, to do that, the best way is to provide job opportunities and growth; there’s no socialist dogma where it’s all about redistribution, he understands that the best way to change people’s lives is to give them opportunity.
“He totally buys into that vision, but you have to realise India had a dysfunctional political system. It was a federal system which, quite frankly, wasn’t working. He comes in with a landslide election that nobody predicted in 2014 and everyone starts thinking he could change things in five minutes.”
In contrast, Schiessl says a long-term headwind India is grappling with is the economic unbalance between supply and demand, which has grown as a result of homegrown manufacturing.
“Has India still got issues? Absolutely. India’s basic issue hasn’t been resolved yet and it’s not going to be fixed overnight. The basic issue is there is too much demand and not enough supply – the exact opposite issue from China,” he explained.
“Why is that? India has a consumption economic, it went from agrarian to consumption. It didn’t do the usual business model, which Britain did first and went agrarian, industrial and then consumption-led.
“The trouble is, when the economy starts to gear up – consumer confidence is rising, job growth is happening – mainly in those consumption sectors, demand explodes.”
He adds that India’s current working age population does not peak until 2055 and is growing at the expense of the number of young and elderly dependents. This has therefore increased spending power even more and has led to a huge consumption boom, according to the manager.
“Because of that huge consumption possibility in India, inflation comes from time to time and derails the cycle. India has been an economy prone to inflationary periods and hence many of the population buys into gold,” he said.
“For the Indian consumer, gold has been a fantastic place to protect yourself against inflation, but this is all changing.
“There are a lot of reforms being undertaken today and, therefore, inflation is under control, China is slowing down as it is implementing a business model that is less structurally intensive. China consumes 10 times the amount of commodities as India, so China slowing down means globally we don’t see a longer term impact of imported inflation from high commodity prices.
“India can industrialise and roll out infrastructure now. There’s no imported inflation issue, it’s more the domestic side and domestically there are some reforms in place that will begin to address the bottlenecks in the system.”
Despite this, however, some investors argue that India is now looking expensive. While the market lagged its emerging market peers last year, its fundamentals have led to the country to fall back into favour with foreign investors.
Year-to-date, the MSCI India index is already up 16.25 per cent while the MSCI AC World index has returned 6.85 per cent in sterling terms.
Performance of indices in 2017
Source: FE Analytics
“People often ask me why India is so expensive compared to Russia and Brazil. You can talk about the lovely structural reasons, the demographics, the urbanisation story that’s about to start, the reforms. That’s all big top-down stuff,” Schiessl said.
“The reality is it’s expensive because of the companies. You genuinely have world-class management teams.”
He uses the example of India’s biggest vehicle manufacturer Tata, which bought the unloved Jaguar Landrover company from Ford back in 2008 after they struggled to make any money from the firm.
“While it had a good brand, that was it. It was generally a middling-to niche-proposition,” the head of equities said.
“To give you an illustration of why I believe India does have phenomenal management, if you look at that story now, it’s by far Britain’s most successful car manufacturer.
“Why? Because you have an owner that has given a vision to the management team of where they want to go to, and it has given them time and the investment to go there.”
He says the UK stock market is often shorter-term in its time horizon compared to the Indian equity market, many companies in which have a 10- to 15-year vision of how they want the firm to develop and progress.
“The simple fact is that, among good companies in India today, the domestic opportunity is so profound. We have many domestic stocks in our portfolio that have been growing between 20 and 30 per cent each year,” Schiessl said.
“But if you think the pressure on management teams when you’re doubling your business every three or four years, it’s horrific.
“Fast growth can derail a business as much as no growth or negative growth. Because you have such fast growth, you have to have a management structure in place that can cope with that and think 10 to 20 years in the future. I think a lot of Indian companies do exactly that.”
Since the launch of the Luxembourg-domiciled Ashburton India Equity Opportunities fund, it has returned 156.48 per cent, outperforming its sector average and benchmark by 55.08 and 69.9 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The $109m fund has a clean ongoing charges figure of 1.65 per cent.