Fund managers back Indian PM to deliver prosperity
Under the leadership of Prime Minister Narendra Modi, India has undertaken major reform efforts in recent years, as highlighted by the surprise demonetisation initiative in November last year. This was when Modi declared that all 500- and 1,000-rupee notes – making up 86% of the cash in circulation in India – could no longer be used in shops.
Next on Modi’s agenda this year is a Goods and Services Tax, which may eliminate a significant amount of red tape still plaguing the economy.
Below, three fund managers outline their views on India and Modi, as well as highlight areas that may thrive in this reforming economy.
The auto sector and industrials
Jonathan Schiessl, CIO and lead manager of the Ashburton India Equity Opportunities fund, says: “Recent election results from five Indian states have overwhelmingly supported the Bharatiya Janata Party (BJP) of Prime Minister Narendra Modi. This result indicates that Modi’s reform gamble in regards to demonetisation has paid off. This is evidence the ‘common man’ views Modi as a saviour who will drive out corruption and make the lives of ordinary Indians incrementally better.
“These results also conclusively set-up India for a period of political stability likely to last for at least seven years, unique in emerging markets and indeed globally. Indian assets were not pricing this outcome and we expect the boost to sentiment to aid both the stock market and the Indian rupee.
“India remains a domestic story, driven by long-term structural drivers of demographics and urbanisation. These factors lead us to primarily focus on Indian-listed companies tapped into domestic demand.
“While we have overweight positions in consumer-focused companies across a variety of areas, we have a particular focus on the auto sector. We also have an overweight to the industrials sector, which is playing into India’s efforts to roll out much needed infrastructure. Our investments will benefit from the large uptick in spending on roads, as well as the development of rail and logistics facilities.”
‘Modi is unlike any politician we have seen in India for some time’
Jorry Rask Nøddekær, manager of the Nordea 1 – Emerging Stars Equity fund, says: “I was in India when the surprise demonetisation announcement was made, which was quite a surreal experience. The Indian economy was able to hold up a lot better than many market participants expected after the demonetisation, with GDP growth of 7.1% forecasted for the 2016/17 financial year.
“The effort will allow India to operate in a more structured way and bring the ordinary person on the street into the formal economy. We believe this step will reap major rewards over a five to 10-year time horizon. It has also sent a signal to India and to the rest of the world that Prime Minister Modi is for real. He does not fear being held hostage by other politicians or any special interest groups. He is unlike any politician we have seen in India for some time.
“One of our highest conviction positions is in mall developer Phoenix Mills. A recent major deal with Canada’s Pension Plan Investment Board has given Phoenix Mills’ balance sheet a boost and will allow it to rapidly expand its mall projects. Financials is another area we are bullish on.
“There are a number of positive fundamental drivers of steady income growth for banks, with the government’s efforts to boost the formal economy likely to significantly boost penetration.”
A top 10 holding is Power Grid Corporation of India
Gary Greenberg, head of emerging markets at Hermes Investment Management, says: “Modi’s government has made a good start in its effort to underwrite sustainable long-term growth and modernise the country. Its substantive reforms, aiming to fix structural problems in its economy, contrast with the Chinese government’s recent tactic of short-term fixes to temporarily boost growth.
“A new India is emerging, and the space once held by outdated conglomerates is being claimed by businesses willing to compete through innovation and efficiency. Investing in India during this transitionary phase is challenging, but identifying companies that will outperform on a long-term basis is key.
“HDFC Bank remains untroubled by bad loans and continues to compound earnings at 20% a year. Prudent lending, unencumbered by a requirement to finance the pet projects of local governments, accounts for the majority of the difference in credit quality between private and public sector banks. Meanwhile, HDFC has been a pioneer in leveraging technology to expand its franchise in the vast, but nascent customer base of rural India.
“Another top 10 holding is Power Grid Corporation of India, a company tasked with the expansion and strengthening of India’s inter-state transmission networks. Its work is essential in connecting states with power surpluses or deficits. The company has an order backlog of $20bn, which it will act on over the next four-to-five years.”