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What’s behind the 20% rally in Indian funds?

22 June 2017

As Indian markets continue to hit new highs, managers focused on the sector are benefiting from a reform-minded government and strong economic growth.

By Rob Langston,

News editor, FE Trustnet

The Indian market has been one of the best performance stories in 2017, with country specialists increasingly found among the Investment Association’s top performing funds.

As a member of the BRIC group – Brazil, Russia, India & China – of fast-growing economies, India has garnered much attention from institutional investors and has increasingly become a topic of discussion in the retail market.

According to the latest figures from the International Monetary Fund, the Indian economy grew by 6.8 per cent in 2016 and is forecast to grow by 7.2 per cent and 7.7 per cent in the following two years, one of the fastest rates of economic growth in the world.

The rapidly expanding economy has also had an impact on the country’s listed companies, which have seen markets rise at a strong clip.

The Sensex – the blue-chip index representing the 30 largest companies by free-float capitalisation on the Bombay Stock Exchange – broke through the 31,000 barrier in June and has continued to perform strongly.

The MSCI India index has been one of the strongest performing markets of 2017, having risen by 18.51 per cent compared with an 8.93 per cent rise in the MSCI AC World index, as the below chart shows.

Performance of indices YTD

Source: FE Analytics

Indeed, some of the best performing funds from the Investment Association universe have been India-focused strategies.

The three crown-rated GS India Equity Portfolio is up by 27.38 per cent, while the three crown-rated Invesco India Equity fund managed by Chandrashekhar Sambhshivan has risen by 25.01 per cent.

Indeed, a bespoke IA India sector compiled by FE Trustnet has risen by 21.14 per cent in 2017, so far, compared with an 8.56 per cent for the average fund in the IA UK All Companies sector – the largest in the Investment Association universe.

Below, analysts and fund managers explain what has been behind the rally in Indian equities and some of the areas where they see the best investment opportunities.

Shilan Shah, India economist at consultancy Capital Economics, said Indian prime minister and the leader of the BJP party Narendra Modi has strengthened his position forcing through “necessary but unpopular reforms”.

Shah said: “The rally reflects in part a broader pick-up across most major emerging market equity markets, but local factors including the BJP’s increased political capital have also helped.”


“We remain very positive on the outlook for Indian equity markets as we move into the last two years of prime minister Modi’s term,” said Jonathan Schiessl, CIO and lead manager of the Ashburton India Equity Opportunities fund.

“We believe earnings have finally bottomed and that the non-performing loan issue that has been plaguing India’s banking system is finally being properly tackled.”

The strong market reaction has come as a surprise for many India watchers particularly after Modi took the unprecedented step of demonetisation of all 500 and 1,000 rupee notes in a move aimed designed to undermine the shadow economy and the circulation of fake notes.

However, although the move may have impacted economic growth it demonstrated that Modi was willing to act decisively.

Jorry Rask Nøddekær, manager of the Nordea 1 Emerging Stars Equity fund, said: “I was in India when the surprise demonetisation announcement was made, which was one of the wildest initiatives I have ever seen a politician take – remarkable for such a large economy.

“It sent a signal to India and to the rest of the world that prime minister Modi is for real. Modi is passionate about reforming India and if he truly believes in something he is willing to take swift and decisive action. He is unlike any politician we have seen in India for some time.”

Another controversial reform was the introduction of the GST – goods and services tax – which is designed to replace multiple other levies imposed by state and central governments.

Ashburton manager Schiessl said: “As the 1 July implementation date for the pan-India GST nears, fears the tax would be inflationary have been put at ease following further announcements of tax rates on certain key products.

“While we still await the tax rates on a final few products, we can confidently say GST will be neutral from an inflation perspective, which is much better than previously expected.”

GDP per capita (USD) since 1990

Source: World Bank

The manager said he is bullish about the domestic economy noting both burgeoning consumer demand, as the above chart demonstrates, and increased government spending on infrastructure.


“India remains a domestic story, driven by long-term structural drivers of demographics and urbanisation,” said Schiessl. “These factors lead us to primarily focus on Indian-listed companies tapped into domestic demand.

“While we have overweight positions in consumer-focused companies across a variety of areas, we have a particular focus on the auto sector.”

He added: “We also have an overweight to the industrials sector, which is playing into India’s efforts to roll out much needed infrastructure. Our investments will benefit from the large uptick in spending on roads, as well as the development of rail and logistics facilities.”

Meanwhile Nordea’s Nøddekær said he was bullish on the Indian financials sector, highlighting a number of positive drivers of steady income growth in the banking sector.

He said the government’s efforts to boost the formal economy – through demonetisation – was likely to significantly boost penetration.

The fund manager said banks had also become better at monetising clients through cross-selling of mortgages, insurance and asset management products, while IT improvements also boosted bank return profiles.

“We bought into financial conglomerate HDFC, a powerful mortgage operator with a major stake in HDFC Bank, after its share price saw some pressure due to the demonetisation announcement,” he said. “We have liked the company for a long time and used this as an attractive entry point.

“Life insurance, a sector we like on a standalone basis, is also another appealing aspect of HDFC – with its life arm poised to merge with rival MAX. We believe it will create an incredibly strong insurance franchise in India.”

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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.