Reforms add shine to Indian equities

Government policies have boosted the appeal of Indian equities and the country’s interdependence from global trade risks makes it an attractive long-term bet, according to Blackrock.

Reforms add shine to Indian equities


Indian equities have become more attractive because of Prime Minister Narendra Modi’s pro-business structural reforms, according to Blackrock’s global chief investment strategist Richard Turnill.

Modi was elected prime minister in 2014 and his BJP government’s reforms include slashing costly fuel subsidies and recapitalising the banking sector to address non-performing loans.

Turnill said such measures have “increased financial penetration” and brought “swathes of the informal economy into the formal economy” which are supportive of long-term growth.

The administration of former prime minister Manmohan Singh began the process of ending state control over petrol prices in 2010 in an effect to tackle India’s budget deficit. The policy has been continued and expanded under the Modi administration.

“Subsidies as a percentage of gross domestic product (GDP) have declined,” Turnill says, adding that the Modi administration has streamlined the subsidy system cutting out wasteful intermediaries.

India announced plans last year to inject 2.11trn rupees (‎€26bn) into the country’s state-controlled banks to bolster their risk buffers and support the financial system.

“The clean-up of nonperforming loans and banking sector recapitalisation is clearing the path for private sector investments and a long-awaited recovery in capital expenditure spending,” he says.

“Corporate earnings in India are looking up again, with analysts expecting 2018 earnings growth in the area of 21%.”

Indian funds

Over the three years to end-February 2018, European-domiciled Indian equity funds returned 7.16%, according to FE Analytics. (To put this in perspective European-domiciled emerging markets equity funds returned 11.15%, China equity funds returned 28.89%, and greater China equity funds at 27.26% during the same period.)

The top European-domiciled India equity fund, Normura India Equity A, however, returned 34.57% over the three years to end-February. The fund had its highest sector allocation (39.63%) invested in financial services – its top holding was Mumbai-headquartered Housing Development Financial Corporation (HDFC) Bank at 9.8%.

The second best performing fund, Kotak India Midcap A returned 28.83% and also had its highest sector allocation in financial services (23.25%). Its top holding was Hindustan Petroleum at 7.73%.

Over the same period, there were only four funds that produced negative returns between –0.62% to -3.62%.

Top five European-domiciled Indian equity funds v emerging market sectors

Over the five-year period to end-February 2018, the lowest performing European-domiciled Indian equity funds returned 59.23%, on the back of India’s buoyant stock market.

The Indian equity funds sector itself for the same period returned 75.9%.

Turnill said India was less correlated to the global cycle than most of its emerging market peers and its domestic resilience underpinned Blackrock’s confidence in the country.

“The equity market is not cheap at 17.5 times forward earnings. But it remains one of our preferred markets in the emerging world due to its strong growth outlook and relatively low dependence on global trade,” he says.


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