The recent correction in India represents a buying opportunity in an emerging market with “brilliant demographics” and strong earnings growth, according to industry experts.
India is the second-best performing of the major BRIC (Brazil, Russia, India and China) emerging markets over the past five and 10 years, with the MSCI India index returning 68.44 and 97.26 per cent respectively.
Performance of indices over 10yrs
Source: FE Analytics
While it is down 9.25 per cent since its peak towards the end of January, a variety of industry experts have dismissed the fall as nothing more than froth being blown off the top of the market and say it represents a buying opportunity.
“For investors who missed out on the strong rise for Indian equities in 2017, the recent decline provides an entry point to a market that we still believe offers strong potential over the medium to long term,” said Simon Finch, co-manager of the Ashburton Chindia Equity fund.
Sheridan Admans, investment manager at The Share Centre, said he wasn’t surprised by the recent sell-off, with valuations looking toppy compared with their long-run average, while demonetisation and the implementation of the Goods and Services Tax have affected growth.
However, he said that the government policies will stand India in good stead over the long term and has faith that prime minister Narendra Modi will keep up the good work.
“Modi continues to implement reforms which are very pro-growth and this is on top of brilliant demographics in India,” he added.
“India got a big boost last year when Modi won some regionals which he wasn’t really expected to win. We’re of the view this means there is more chance of him winning a second term than not and then we think he will get another leg-up.”
Anh Lu, portfolio manager of the T. Rowe Price Asian Ex Japan Equity fund, said another positive move by the government was the $32bn recapitalisation of India’s state-controlled banks, many of which are plagued by bad corporate loans.
“While this was not the major financial system overhaul some deemed necessary, it was certainly a step in the right direction,” she added.
“The reforms have not always been delivered in the clearest and most constructive manner, prompting confusion and leading to market volatility. However, there is little doubt the government is committed to delivering necessary reforms in order to secure India’s long-term economic health.”
Finch said the macroeconomic picture is not the only thing that is making him optimistic about the prospects for India and noted the earnings picture is looking up as well. He pointed out many laggards over the past 18 months – such as the IT sector – have recently shown signs of recovery and have the potential to do well on a relative basis for the remainder of the year.
“We are now seeing signs of stabilisation, with growth coming through faster than expected in the final quarter of 2017,” he continued.
“We also recently saw growth expectations for the full year – which ended on 31 March – showing signs of improvement.”
“This growth upswing is translating to the corporate sector, with 14 per cent earnings growth expected for the NIFTY [one of India’s two main stock exchanges] over the full year, which is near initial expectations a year ago. This is a far cry from previous years, where initial earnings forecasts were continually revised downwards to the low single digits.”
The outlook for India is not all positive, however. Despite the fact Lu is optimistic about the general political situation, she remains underweight the country, pointing out equity valuations appear demanding in many sectors. As a result, she said she has been content to allocate selectively to the market.
“While our long-term positive outlook on the market remains intact, we are waiting for signs of revival in the capital expenditure cycle before we make a further allocation to the market,” she added.
Anthony Rayner, a fund manager on Miton’s multi-asset portfolios, said the fact India doesn’t export commodities and is a net importer of oil differentiates it from other emerging markets. However, Admans said this can put it at a disadvantage and is another one of the reasons it has done poorly this year.
“Oil has been ticking up and one of the risk factors with India is if oil prices go too high, it has no reserves. If oil spikes, that’s a problem and import costs will go up. So you need to watch that space, but we are not looking to jump ship, you just have to weather it out.”
Jupiter India is the eighth-largest holding in Admans’ TC Share Centre Multi Manager Adventurous fund. It is also the only India-focused product to appear on the FE Invest Approved Funds List, with the team describing it as a "punchy way to invest" in the country for anyone with a strong conviction.
“The fund has around 50 per cent in small- and mid-sized companies, which adds volatility to the fund, although manager Avinash Vazirani’s focus on value and quality businesses means that the fund doesn’t do as badly in falling markets as this might suggest,” it said.
However, the team also warned investors should be aware of the risks of investing in a single-country fund: “In particular, in the case of India, hot money flowing in and out can add extra volatility. Vazirani also holds significant positions in companies off the main market, which means that performance can diverge from the market index at times.”
Jupiter India has made 179.73 per cent since launch in February 2008, compared with 69.7 per cent from the MSCI India index.
Performance of fund vs index since launch
Source: FE Analytics
It is £967m in size and has ongoing charges of 1.07 per cent.