A year after it overtook China as the world’s fastest expanding major economy, India continues to be the shining light for growth in emerging markets.
Under the leadership of Prime Minister Narendra Modi, India has undertaken major reform efforts in recent years, as highlighted by the surprise demonetisation initiative late last year. Next on Modi’s agenda this year is a goods and services tax, which will hopefully eliminate a significant amount of red tape still plaguing the economy.
Below, five fund managers outline their views on India and Modi, as well as highlight the areas likely to thrive in this reforming economy.
Jonathan Schiessl, CIO and lead manager of the Ashburton India equity opportunities fund
Recent election results 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. 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.
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.
Jorry Rask Nøddekær, manager of the Nordea 1 – emerging stars equity fund
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 current 2016-17 financial year.
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.
Andrew Keirle, portfolio manager of the T. Rowe Price emerging markets local currency bond fund
India’s bond market has not always been a high priority for EMD investors. The perception it is somewhat opaque and difficult for overseas participants to access has deterred many from exploring the market. But the Indian fixed income space has been gradually opening up to international investors in recent years, while a more attractive opportunity set has arisen on the back of the country’s long-term disinflation trend, its positive growth trajectory, and the reforms implemented by Modi’s government.
The market is less exposed to forced selling than some emerging market peers during periods of risk aversion, owing to the small proportion of overseas participants. Furthermore, the market has a fairly low correlation to US treasuries. In addition, Indian government bonds have a higher yield than the bonds of many Asian peers, which are not on such a positive reform track.
However, potential investors in Indian bonds will also need to consider the hazards posed by the country’s significant bad debt problem and its myriad political risks before embarking on what is still a relatively untrodden path. While access to overseas participants has started to improve in recent years as the Indian government has sought to open up the market to international investors, there are still limits on the amount of Indian bonds foreign investors can hold.
Gary Greenberg, head of emerging markets at Hermes Investment Management
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.
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.
Another top ten 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.
Roberto Magnatantini, head of global equities at SYZ Asset Management
Since Modi’s overwhelming electoral win in 2014, he has aggressively pursued reforms, including recent demonetization of large currency notes, upcoming general sales tax restructuring and a new companies bankruptcy code. While creating short term pains such as cash-crunch in the economy and hurting consumer exposed sectors including staples and real estate, the reforms represent an opportunity for the South Asian country to correct some of the logjams ailing its economy and set itself on the path of reform-led growth.
Autos look compelling on earnings growth prospects. Another sector we view as attractive is media, given the size of the local advertising market. Within media, the television broadcasting industry is receiving healthy monetisation on the back of the digitisation currently underway.