10th November 2015
Attention will turn to India this week as an official state visit from India’s Prime Minister, Narendra Modi, coincides with Diwali – India’s festival of lights.
For investors, India has been a bright light in recent months as the outlook for emerging markets has become increasingly divergent. Ayesha Akbar, portfolio manager, Fidelity Solutions outlines why India may be in a better position than other emerging markets and discusses the significance of the state visit…
India is in a better position than many other Emerging Markets and could be seen as a safe port of call during the current Emerging Market (EM) difficulties. This view is reflected among the emerging market fund managers we monitor and select for our portfolios, with many favouring India over other regions.
The EM sphere as a whole has been severely affected by the pace of the slowdown in China, as well as falling commodity prices. As a net importer, however, India actually benefits from falling commodity prices, which have helped to sharply reduce its current account deficit and boosted consumer demand at home.
The lower current account deficit should also mean India is better able to deal with tighter financial conditions if the dollar appreciates on the back of Fed interest rates rises.
While China is India’s second biggest destination for exports, it is not overly significant, with goods exports accounting for $13.3bn in 2014 – or around 4.2% of the $317.7bn total. In contrast, India exports over three times as much to the US.
As we move into 2016, we could see a theme of EM differentiation playing out, with economies such as India finding favour over countries such as Brazil, which are likely to continue suffering.
In the longer term, if Prime Minister Modi can deliver economic reforms and greater foreign investment in the country, India represents an attractive choice especially for investors who want to play the theme of EM differentiation.
The state visit to the UK comes almost immediately after that of Chinese President, Xi Jinping. Both countries can benefit from what the UK offers – chiefly financial expertise and developing their financial systems.
“While China is explicitly trying to internationalise the renminbi, India is not seeking a greater international role for the rupee just yet. Instead, one area of focus could be India’s growing corporate bond market, which currently has restrictions on foreign ownership of bonds.
If India can liberalise this and promote international interest in its corporate bond market, its companies could gain better access to finance and help to drive higher economic growth.
Reforms such as this could herald greater cooperation between the financial sectors of London and Mumbai, just as the internationalisation of the renminbi could bring new business to the UK.
For investors considering exposure to Indian equities, Akbar highlights three funds to consider…
Franklin India Fund
Franklin’s Chennai-based Indian equity team is headed up by longstanding team member Sukumar Rajah, who draws upon co-manager Stephen Dover and a 14-strong team who contribute to the portfolio. This fund is built mainly on a stock-picking basis, with broader economic considerations generally incorporated at the stock analysis level. The team looks for companies that can provide long term growth independent of the economic cycle.
For investors looking for India exposure via a broader emerging markets vehicle might consider:
JPM Emerging Markets Fund – India exposure (24%)
The fund is run by Austin Forey who has been running emerging market portfolios at JP Morgan since 1994, and co-managed by experienced macroeconomic strategist Leon Eidelman. While based in London, Forey can draw upon JP Morgan’s considerable emerging markets resources based in nine main centres around the world.
The fund is run primarily on a stock-picking basis, and is looking to invest for the longer term. It tends to have a bias towards growth stocks, and while it can invest across the board, it will tend to hold larger sized companies in the portfolio. The fund is relatively concentrated with 50-75 holdings, and can differ significantly at times from the benchmark index. India is the fund’s top geographic exposure with 24%, which is significantly above the benchmark.
Fidelity Emerging Markets – India exposure (17.6%)
Fidelity’s Global Emerging Markets Equity strategy invests in developing countries across the globe, taking advantage of high levels of economic growth across Latin America, South East Asia, Africa, Eastern Europe (including Russia) and the Middle East.
The aim of the strategy is to provide investors with long-term capital growth from a diversified and actively managed portfolio of securities that offer material exposure to, and/or derive a significant proportion of their earnings from, the developing economies of the world.
Although the income from these funds is expected to be moderate, the team does have an affinity for companies that pay a dividend to their shareholders. Once again India is the fund’s biggest country exposure with 17.6%.