With some emerging markets beginning to reopen their economies as the threat of coronavirus recedes, BlackRock Emerging Markets fund manager Gordon Fraser says he has become more bullish on India since the onset of Covid-19.
It has been a difficult year for Indian equities with the MSCI India index down by 15.05 per cent year-to-date, in sterling terms. In comparison the regional rival China is now posting positive returns, with the MSCI China index up by 4.9 per cent.
Performance of indices YTD
Source: FE Analytics
While China was the first country to be impacted by Covid-19 and one of the first to exit the crisis. India continues to deal with both the human and economic challenges of the coronavirus.
As a production and manufacturing powerhouse, the lockdown has ground economic activity to a halt, despite prime minister Narendra Modi’s call for businesses to take advantage of trade route disruption and pumping $265bn of stimulus – or 10 per cent of its GDP – to help boost the economy.
Although businesses are now allowed to reopen and lockdown is being eased, India has yet to see a downturn in the number of Covid-19 related deaths with the current figure at 8,102 deaths and 297,535 confirmed cases, as at 11 June.
Despite the still uncertain and unresolved Covid-19 situation, BlackRock’s Fraser said he has taken a more positive view on India than he did prior to the pandemic, specifically in the financials and consumer discretionary sectors.
He said: “We are now more positive on India after the market pull back, as we see its economy more resilient through time.”
“Looking at our country weightings, pre-Covid-19, our stance on India had been neutral-to-cautious, as we felt equity valuations were stretched and the market overly owned by both domestic and foreign investors.
“However, since the Covid-19 breakout, the fear that India might be severely impacted has put pressure on both the currency and the equity markets, depressing valuations and offering very interesting entry points for specific stocks and sectors.”
The FE fundinfo Alpha manager said that, as of the end of April the £374.5m BlackRock Emerging Markets fund had an 11.6 per cent exposure to India, the second largest relative overweight in the portfolio.
A greater allocation to India wasn’t the only change Fraser made to the five FE fundinfo Crown rated fund since the pandemic took hold of markets.
Coming into the crisis, Fraser said he’d learnt from mistakes in the previous 2008-9 global financial crisis and shored up on liquidity as last time “it had dried up very quickly”.
This decision had helped at the very early stages of the crisis when there was even greater uncertainty and volatility.
“We reduced risk in our portfolios, while equity markets appeared unconcerned about the risk of a global recession,” he explained.
While China has emerged as one of the strongest performing markets this year, the impact of Covid-19 cannot be overlooked.
It had already been experiencing an economic slowdown going into the crisis, but China was hit hard by the pandemic with its economy shrinking for the first time in a decade, according to official sources, contracting by 6.8 per cent during the first quarter.
But Fraser was not overly concerned about the fate of China despite the size of his exposure in the portfolio (35.66 per cent) and weighting in the MSCI Emerging Markets index, at just under 40 per cent.
“Investment in countries outside of Asia continues to shrink in our universe – for example, our investment in the whole of Latin America is now the same size as a single Chinese internet company in our benchmark,” Fraser said.
“Markets tend to move ahead of actual economic events. That is why markets have sold off earlier this year as Asia entered lockdown and have quickly bounced back to normal since then,” he said, adding that it was too early to truly see the full economic impact of the lockdown.
Although Fraser expects China’s Q2 year- over-year contraction to be around 3 per cent, “a phenomenal achievement, if we get there”, he said it is too early to be certain about what markets and economies will be like post Covid-19.
“This is why we focus on things we can control, by picking the right stocks in the right sectors and countries,” he explained. “As investors, what the Covid-19 crisis has offered us so far is the possibility to enter certain investments at very attractive valuations.”
Fraser concluded: “We are convinced that economic cycles, not trends, define opportunities in emerging market equities.
“In our view, this should be one of the key areas of focus for investors looking to increase their emerging markets exposure.”
Performance of fund vs index & sector over 3yrs
Source: FE Analytics
The BlackRock Emerging Markets fund has made a total return of 25.92 per cent over the past three years, outperforming both the MSCI Emerging Markets index (6.87 per cent) and the average IA Global Emerging Markets fund (2.55 per cent). It has an ongoing charges figure (OCF) of 0.97 per cent.