Darius McDermott: Time to reconsider India?

Bleak emerging market sentiment has hit Indian equity valuations

Cheapest UK equity funds fail to perform

Over the course of 2018, emerging markets have been kicked to the curb by investors as a stubbornly high US dollar and rising US interest rates have made the asset class less attractive.

In the very short term, they have been proved right to do so because, while emerging markets have moved pretty much in the same direction as developed markets in the past few years  – albeit to a lesser extent – this year they have done the opposite: the MSCI Emerging Markets index is down 3.28%* in sterling terms, while the FTSE All Share is up 1.59%* (in spite of Brexit worries) and the S&P 500 is up a huge 13.15%* – and has recently recorded the longest bull market in its history.

However, we think that the market falls in the developing world make it look far more attractive over the long term – Indian equities, in particular. Not only do we believe the market area is attractively valued relative to its own history, we also think prime minister Narendra Modi’s ongoing economic reforms are improving – and will continue to improve – the country’s outlook.

A recent report from the IMF found that India now accounts for around 15% of global growth. Not only this, it forecasts India’s growth to rise to 7.3% this fiscal year to March 2019 and 7.5% in the year after. The IMF expects India’s growth to accelerate because of Modi’s demonetisation policy – which should mean more money is circulating within the economy – and the Goods and Services Tax (GST), which was introduced to unify India’s formerly complicated and inefficient tax system.

Add to this a young and entrepreneurial population and significant scope for growth, and it becomes difficult to see why investors wouldn’t want Indian equities in their portfolios.

Below, I look at three Elite Rated funds which either focus solely on India or have exposure weightings to the country.

  • Goldman Sachs India Equity Portfolio

We particularly like Goldman Sachs India Equity Portfolio, as we see it as very much an “all-weather” India fund. It is headed up by Hiren Dasani, although the fund adopts a genuine team-based approach to investing.

Dasani and the 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 within the small and mid-cap space.

That’s not to say that the team isn’t risk-conscious – the opposite, in fact. It believes the best way to minimise risk is to genuinely understand each individual business model through in-depth research. This includes scrutinising every company’s financial statements, visiting the firms themselves and grilling the management teams, monitoring financial performance and getting under the bonnet of each business strategy. These measures are made possible by the fact the team is based on the ground in India. Not only does this mean they can monitor the companies closely, they also have a good understanding of the country’s economic and political backdrop on a day-to-day basis.

  • Ashburton India Equity Opportunities

Managed by Jonathan Scheissl, this fund has an unusually concentrated portfolio of just 20 to 30 stocks. These are chosen regardless of the size of the company, and with very little regard for the fund’s benchmark. In fact, the fund tends to look completely different from its benchmark, because the index is dominated by large-caps and Jonathan believes the best opportunities remain hidden further down the market cap spectrum.

When building the portfolio, the manager will first analyse the broader economy to gauge which market areas have the most attractive long-term prospects. Then, when picking companies from within these sectors, he has a keen focus on firms which treat their minority shareholders well.  Because of Jonathan’s initial focus on macroeconomics, the manager and his team is able to make sure the fund is well-diversified, even though it consists of a small number of stocks.

  • Magna Emerging Markets Dividend

While this is a global emerging markets fund, it has a 12.8% weighting to India. This means it could be better suited to investors who don’t want to hold an entire fund dedicated to Indian equities, but who want to benefit from some indirect exposure.

Manager Mark Bickford-Smith aims to capitalise on a changing culture within emerging markets – in recent years, more and more companies are paying closer attention to minority shareholders and are paying out dividends. This means the manager looks to combine the higher levels of capital growth which emerging markets offer, alongside a stream of income which he hopes will also grow over the long term.

Mark looks for firms with high-quality management teams, robust business models and sustainable earnings growth. Of course, in order to keep his fund generating an income, he also only buys into companies which respect shareholder interests and will reward them with income payouts. The manager believes emerging markets are a particularly fertile ground for investment opportunities, because a lot of quality companies are under-researched or their market values are based on short-term themes. Mark and his team of analysts generate their own company research and investment ideas through personal experience, local knowledge and contacts.

*Source: FE Analytics, 29 December 2017 to 22 August 2018, total returns in sterling.

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