After a positive first term for Indian prime minister Narendra Modi from an investor standpoint, signs that a second term in power could be in the offing should be positive.
As a general election for world’s largest democracy begins on 11 April – with an estimated 900 million voters set to vote – numerous polls have favoured Modi's BJP party.
Since Modi took office on 26 May 2014, the MSCI India index has made a total return of by 71.65 per cent in sterling terms, compared with a 52.02 per cent gain for the broader MSCI Emerging Markets index.
Performance of indices since Modi took office
Source: FE Analytics
However, with election outcomes often difficult to predict, investors should not be too worried if Modi is not returned as prime minister.
Rob Marshall-Lee, head of emerging and Asian equities at Newton Investment Management, said while a second term for Modi would be “a very good thing for markets”, the reforms put in place would not necessarily be unwound should he be replaced.
“This has been one of, if not the best government in the world over the last few years,” he explained. “The Modi government has put in place numerous economic reforms that will have positive consequences over a number of years to come and it is unlikely that a new government would fully unwind them.”
Prashant Khemka, founder of White Oak Capital Management – the investment adviser to Ashoka India Equity closed-ended strategy – said that the Indian equity market offers investors access to emerging market returns with developed market institutions.
“As in developed markets, India’s mature democratic institutions and rule of law grant meaningful rights to even foreign minority shareholders,” Khemka said.
“These shareholders have the right to sue government organisations whenever they are on the wrong side of the law – something no investor may dare think of in most authoritarian emerging markets.”
It is also supported by strong demographics, said David Cornell, chief investment officer of Ocean Dial Asset Management, manager of India Capital Growth.
Cornell explained: “India has a large population with a low dependency ratio, but key to maintaining growth will be cultivating skilled labour. Recently it has welcomed a reverse ‘brain drain’ as young professionals educated or working abroad are moving back home.
“Management is also very strong, demonstrated by the US’s Fortune 500 where, of 75 foreign chief executives, 10 are from India, far exceeding other emerging markets.”
Nevertheless, the elections could lead to some short-term volatility and some valuation opportunities.
“Indian revenues and earnings are much more affected by domestic factors, like the forthcoming election,” said Rukhshad Shroff, fund manager of JPMorgan Indian Investment Trust. “However, investors will have the opportunity to remind themselves that the best companies often gain market share in challenging environments."
Kristy Fong, manager of Aberdeen New India Investment Trust, added: “Market weakness based on noise, not fundamentals, will enable us to invest in good-quality companies at more favourable prices.”
Ocean Dial’s Cornell said strong compounded returns from Indian equities over the past decade had demonstrated the market’s ability to perform well “irrespective of the political environment”.
“Beyond the size of the opportunity, this superior performance is in part driven by the country offering numerous high-quality investment opportunities across a broader range of sectors in comparison to its emerging market peer group,” he said. “It is a stockpicker’s paradise and our outlook is turning increasingly positive.”
Quarterly GDP growth since Modi election
Source: OECD
While India has been protected from much of the fall-out from the US-China trade dispute that dominated markets last year, GDP growth did slow to 7.1 per cent, according to the International Monetary Fund (IMF), down from an annualised rate of 7.5 per cent between 2001 and 2010. However, it was ahead of other emerging market powerhouses, such as China (2018: 6.6 per cent), Russia (2.3 per cent) and Brazil (1.1 per cent).
“In India, growth is projected to pick up to 7.3 per cent in 2019 and 7.5 per cent in 2020, supported by the continued recovery of investment and robust consumption amid a more expansionary stance of monetary policy and some expected impetus from fiscal policy,” the IMF noted.
As such, there are a number of funds and strategies that can offer investors exposure to the Indian growth story.
Two India-focused funds backed by Chelsea Financial Services managing director Darius McDermott are GS India Equity Portfolio and IIFL Indian Equity Opportunities.
The $2bn GS India Equity Portfolio has made a total return of 131.62 per cent over the past five years compared with a 92.5 per cent gain for the MSCI India IMI benchmark.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
“This multi-cap fund’s objective is to capture the growth potential of the Indian economy, said McDermott. “It has a slight bias to small- and medium-sized firms and a focus is on investing in sound businesses.
“Manager Hiren Dasani and his team have a very long-term time horizon and a very low portfolio turnover. They are patient investors and, because of this, they can weather day-to-day volatility to tap into significant growth opportunities.”
His second choice is the offshore fund IIFL Indian Equity Opportunities fund, previously known as Ashburton India Equity Opportunities, and managed by Jonathan Schiessl who moved to IIFL earlier this year.
“The fund typically holds around 20-30 stocks and we particularly like the manager’s prioritisation of investing in companies that treat their shareholders properly,” said McDermott.
Jason Hollands, managing director at Bestinvest, said most investors should consider adding exposure to the India through broader global emerging market or Asia Pacific ex Japan strategies.
As such he highlighted the £6.9bn four FE Crown-rated Stewart Investors Asia Pacific Leaders, overseen by FE Alpha Manager David Gait and Sashi Reddy, which has a 31.4 per cent exposure to Indian equities.