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Is India the emerging market winner?

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Written by:
08/10/2015
Emerging markets have endured a challenging 2015. But is India bucking the trend?

It has been a tough year for emerging markets. A strengthening US dollar, collapsing commodity prices and geopolitical tensions have battered many developing equity markets.

One emerging market which has been slightly more resilient has been India and fund managers who invest in the region say it is the key market to watch.

“Current account and fiscal deficits are under control, inflation continues to fall, growth is accelerating and lower crude prices continue to support the rupee,” says Kunal Desai, head of Indian equities at Neptune.

Ajay Marwaha, head of investments at Sun Global, is equally bullish.

“This year, India has overtaken China, the US and the UK as the world’s number one destination for foreign direct investment. Meanwhile, Indian stocks and bonds have been among the best performing markets globally, while a strengthening rupee has led to additional returns for investors,” he says.

“We expect India to continue growing steadily over the next few years, which means a positive outlook for activity and asset prices.”

Immune, or a late-developer?

Despite this positive outlook, India is not wholly immune to the issues blighting emerging markets.

A US interest rate rise, for example, potentially poses a risk to all developing economies.

Last month, World Bank chief economist Kaushik Basu warned emerging markets faced “panic and turmoil”, and “immediate turbulence” when rates go up as the dollar would strengthen against other currencies, attracting capital away from emerging markets.

Government and corporate emerging market debt is also primarily denominated in dollars and so a rate rise could make these liabilities unsustainable.

For Anthony Rayner, co-manager of the Miton Cautious Multi Asset and Defensive Multi Asset funds, “all roads lead to the Fed”. He advises against investing until the impact of a rate hike is clear.

“Every emerging market, and every emerging market asset class – bonds, debt, currencies, equities – are ones to avoid for us,” he says.

“India is fairly unique, and we’re more sympathetic to India than any other emerging market, but the overall environment simply is not good at the moment. The future doesn’t look bright, either.”

“We don’t want to make bets. Rewards have to be tangible, and attractive, before we make a move,” says Rayner.

“We’ll review the market when rates rise. Then, India could become interesting to us from a [portfolio] construction point of view, as it has the potential to behave in a way less correlated to other emerging markets.”

Desai, however, says India is the only emerging market capable of stimulating its stock market with interest rate cuts. Lower interest rates mean lower borrowing costs, and a reduction could theoretically stimulate borrowing and spending by consumers and businesses alike. Rates currently stand at 6.75 per cent. 

“While other economies are in defensive mode, India is something of a special case, emphasising its position as a genuine diversifier in a portfolio,” he says.

Others believe underlying structural issues make India an unappealing prospect. The election in May 2014 of Narendra Modi, who stood on a platform of major reform, led investors to pile in to Indian equities.

Now, the reform agenda is off track. Edward Smith, asset allocation strategist at Rathbones, dubs it a “stunning failure”.

“Modi has capitulated on all-important land acquisition reforms. Even the government finds it difficult to procure land for infrastructure projects. Goods and services taxation is also unfathomably complex, as it is currently set by myriad local authorities,” Smith explains.

“We suspect India is in for a volatile time over the next 12 months.”

Accessing India

For investors who want exposure to India, Tim Cockerill, investment director at wealth management firm Rowan Dartington, favours an India-specific approach, rather than a broader sector or region-based fund. The table below shows that pure India funds have come out on top since Modi’s election.

“Avoid generalist emerging market funds, even if they’re overweight to India. Quality Indian equities will be mixed in with junk,” he says.

However, Cockerill stresses India remains a “fairly high risk” investment prospect. To manage this, he recommends India investment trusts as they allow investors to easily exit and mitigate the impact of fluctuations in the process.

He tips Aberdeen New India Investment trust (currently trading at a 12 per cent discount), and JPMorgan Indian Investment trust (currently trading at a 10 per cent discount).

“In terms of closed-end funds, look out for those that take a conservative approach, investing only in quality companies with strong balance sheets,” he says.

“India looks expensive too, with highly liquid fast-moving consumer goods stocks distorting the market picture significantly, so make sure the fund strips these out – you don’t want to pay for liquidity you don’t need. Look at valuations, and price to book ratios.”

The 10 top performing funds with Indian exposure since 2014 elections:

Name Return (%) Exposure to India (%)
First State – Indian Subcontinent 31.72 81.5
Matthews Asia – India 31.53 90.3
Invesco – India Equity 29.9 95.4
Jupiter – India Select 28.29 100
Fidelity – Global Healthcare 27.83 1.7
Pictet – Health 26.88 0.86
Jupiter – India 26.11 94.89
JOHCM – Asia ex Japan Small & Mid-Cap 25.71 30.5
Goldman Sachs – India Equity Portfolio 25.45 97.5
BlackRock – GF India 21.63 94.84

Source: FE Analytics (26 May 2014 to 25 Sep 2015)

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