11th March 2014
Indian is showing signs of a significant turnaround ahead of the general election says Avinash Vazirani, manager of the Jupiter India Fund.
In a note issued this week, he says: “For the past couple of years, India has been near the bottom of the list of investment destinations, given regulatory flip-flopping, a sharp economic slowdown and a plunge in the rupee. The picture has changed quite considerably in a short period thanks to decisive action by Indian policymakers to avert an economic collapse during the emerging markets crisis.
“The rupee is now the best performer among major emerging market currencies. The currency has bounced back 11% from an all-time low in August 2013. Indian stocks have proved remarkably resilient as well. The Sensex index surged over 9% in the last quarter of 2013. It ended up another almost 2% in January, shrugging off a renewed bout of emerging market jitters.”
Vazirani believes sentiment is changing towards India. “The country looks more stable than some other emerging markets as it benefits from lower budget and current account deficits, moderating inflation, higher growth and a more stable exchange rate.”
The country’s relative success in tackling structural problems that made it prey to powerful external forces illustrates the lesson that investors need to differentiate between emerging markets.
He notes that the current account deficit has fallen from around 4.9% of gross domestic product (GDP) at the beginning of 2013 to around 2.0% due to a squeeze on gold imports, a pickup in exports and a drop in imports.
The Finance Ministry now expects Asia’s third-largest economy to grow 4.9% in the year through March 14, faster than the decade-low of 4.5% in the previous year, and to gain momentum in 2015.
The Jupiter India Fund suffered in last year’s market turmoil. Over one year, the Fund has returned -13.0%, compared to -10.9% for the benchmark MSCI India index as Financials, Healthcare and Consumer Services were caught in the down draft of the emerging markets rout. Vazirani says he adopted a more defensive posture in the second half of the year, which helped to turn around the Fund’s performance. He reduced the weighting in Financials and adopted an overweight position in Technology, particularly IT services. They have subsequently surged. In the six months to end February, the Fund returned 16.9%, compared to 10.7% for the benchmark index.
“Things are picking up. We are seeing increasing flows into equities at the expense of gold and real estate and expect a good run in Indian equities.”
He notes investors have returned to the local market, buying shares in mutual equity funds for the past two months though concedes the amounts are still small, given the current political uncertainty, but he believes these flows will form a base for a step up in investment within a few months.
Vazirani says the last set of company results are evidence of the greater buoyancy in the corporate sector. The results were the best in eight quarters, with earnings growth of over 20%. Inflation has also started to come down on both the consumer price and wholesale measures as the economy responds to the central bank’s recent series of interest rate increases and government measures designed to tackle the budget and current account deficits.
Underlying these results seems to be a change in business mood, mainly fuelled by the hope that a new pro-reform, pro-business government will replace the ruling Congress party in the April elections, Vazirani says. Enthusiasm to do business has grown since November, when the opposition Bharatiya Janata Party won some key state elections, promising a renewal. Companies are also feeling more optimistic after weathering the downturn and absorbing the impact of higher interest rates by cutting costs.
He says a clear example of this buoyancy is the Indian IT services sector. “We have not seen this level of optimism for the sector since 1998. IT companies have a lot of cash and we expect to see some major acquisitions transforming the competitive landscape,” he says.
Interest rate policy
But Vazirani also says swallowing the policy medicine is causing some adverse reactions. He has adjusted his view on interest rates, which he believes may now stay higher for longer because the central bank won’t want to overheat the economy should a new government boost capital spending.
Finance Minister Palaniappan Chidambaram has slashed expenditure to meet a budget deficit target of 4.1% of GDP by the end of March 2015, down from 4.6% in the current fiscal year. This policy is weighing on demand, wages and growth.
Many local commentators have been anticipating a drop in consumer sales growth as a result, but Vazirani is more sanguine. He says demand for status symbol products has strengthened and should continue to do so as the newfound inflation discipline takes effect and the spending power of India’s middle class increase.
Among the risks, he says the looming general election could yield an inconclusive result, depressing business confidence and souring the mood in the markets. The confusing political noise appears to be deterring institutional investors. The credit rating agency Moody’s Investor Services has noted that the fiscal position remains weak and expenditure cuts will probably hurt growth. The IMF said the economy is more stable and resilient than last year but is still dependent on external financing.
Avinash has made his own investigations behind the political scenes on his recent visit. “I met with senior members of the increasingly popular Common Man Party (Aam Aadmi), which seems to be pro-capitalist and anti-corruption.”
The party won a majority in the state elections in Delhi, a political debut that sowed consternation among the major parties in the run up to general elections. It has subsequently resigned from the state government but is now running a nationwide campaign.
“One of our current investment themes is centred on moving into companies that demonstrate an appetite for improving corporate governance,” he says.
“Overall, it is clear that we must continue to look at the market on a bottom-up basis,” says Avinash referring to an investment approach focusing on the the analysis of individual companies. Avinash if a pro-reform government is elected, then he would like to make the portfolio less defensive.
“From an investment perspective, these are pretty good times, even if from a political perspective they seem to be uncertain. However, we will wait for more political clarity before making any significant changes. We only have a few more weeks of that to get through.”