Sat Duhra (pictured) is steering clear of India in his Janus Henderson Asian Dividend Income fund, warning the country’s GDP growth figure doesn’t add up and is likely to be well below the official figure of 7.3 per cent
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India is the fifth highest weighting in the MSCI AC Asia ex Japan index and the fourth highest in the MSCI Emerging Markets index, at 10.79 and 8.47 per cent respectively.
Many UK-based fund managers that operate in these sectors have a much higher exposure than this. For example, Terry Smith came close to breaching the single-country limit in his Fundsmith Emerging Equities Trust last year when his allocation to India reached 41 per cent.
“Everybody loves India,” said Mike Kerley, manager of the Henderson Far East Income trust, who works alongside Duhra on the Janus Henderson Asia ex Japan equities team. “And as far as I can gather, it seems to be the consensus overweight for everybody.”
However, the country is not even in the top-10 positions in the Janus Henderson Asian Dividend Income fund, with Duhra saying that while there has been much cynicism about the latest growth figures released by China, he is far more sceptical about those from India.
Janus Henderson Asian Dividend Income – country breakdown
Source: Janus Henderson
“If an economy is growing at 6 per cent, what you should see is that power production should also be growing at a good rate,” he explained. “You should have a strong housing market and that is what we have seen [in China]. You have railroad freight growing at a good level. And all those metrics stack up with an economy growing at around that level.
“But the one that doesn’t make sense to us is India. This is a country that is allegedly growing at 7 per cent. If you look at everything underlying in that economy, if you look at industrial production, if you look at credit growth, if you look at the state of the big banks there, if you look at job creation – they should be creating 12, 13 million jobs, but they are only creating about 5 million jobs.
“If you look at the fact that private enterprise has not started doing any capex since Modi came in,” he added. “I mean, none of that correlates with an economy growing at 7 per cent.”
To explain why India’s growth figures may be distorted, Duhra pointed to 2015 when the country changed its methodology for its GDP deflator, which aims to show real GDP adjusted for inflation.
The base year was switched from 2004-05 to 2011-12, partly in a bid to reflect the uptake of new technology in recent years. However, Duhra believes that inflation has been understated, which has led to growth being overstated.
“So if you wanted to be very cynical, you could say that when in 2015 it changed the GDP deflator, and overnight its economy went from growing at 5-6 per cent to 7-8 per cent, that was a bit of a fudge,” the manager added. “I mean, that was not reflected in reality.
“And China’s economy is 5x the size of India’s. So even if China is only growing at 5 per cent, you’ve got an economy that is $13 to $14trn, and India, a fifth of that, is only growing at 7 per cent. I mean that is the worrying thing. Because why is a country with a GDP per capita of $2.5k only growing at 7 per cent – if that even is the right number?”
This is not to say Duhra thinks India is a total disaster. He accepts prime minister Narendra Modi is moving the country in the right direction and has been encouraged by various reforms such as the anti-corruption drive, diesel deregulation and the introduction of the goods and services tax.
However, he pointed out the problem with India is that its government is far more decentralised than somewhere like China. This means that to follow in China’s footsteps, such as by carrying out land and labour reform or building a manufacturing base, it requires cooperation between individual states and the government – where the relationship is often poor.
Worse still, Kerley said this situation is likely to deteriorate, with elections in May representing a major risk.
“In the last election, Modi was the first leader to have a majority in government for god knows how long,” the manager explained. “But in reality, he still had to negotiate with each of the states because a lot of things are done at a state level – and a lot of the hopes for change didn’t really happen.
“But this time it seems unlikely he is going to get the majority he had last time, even if he wins at all. So the chances are you get less done, either way. And if [opposition party] the Indian National Congress gets in, the market will take that pretty poorly.”
Data from FE Analytics shows Janus Henderson Asian Dividend Income has made 46.74 per cent since Duhra joined in November 2013, compared with 49.43 per cent from its sector and 33.88 per cent from its MSCI All Countries Asia Pacific ex Japan High Dividend Yield index benchmark.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
The £129.3m fund is yielding 6.4 per cent and has ongoing charges of 0.88 per cent.