Investors are “far too optimistic” about the speed and extent of reforms in India, according to First State Investments.
The managers on the First State Stewart team, the firm’s group of equity managers running its Asian, emerging market and global funds, have long had a positive view of Indian companies.
But the managers have sought to lower expectations for the country’s equity markets following an extensive rally on the back of Narendra Modi’s election last year.
Since Mr Modi was elected in May 2014 the MSCI India index has risen by 40 per cent in sterling terms, making it one of the top-performing equity markets in the world of late.
In a note to investors, the managers of the First State Asia Pacific ex Japan fund, headed by Angus Tulloch, warned that although “progress is being made on the reform front in small incremental steps” since Mr Modi took power, “investors may be too optimistic about what can realistically be achieved”.
First State said: “We are concerned that too much is being expected too soon, and we believe that change will be gradual.”
First State has long held overweight positions in Indian equities across its Asia Pacific and Emerging Markets funds, citing the high-quality businesses that the country has produced.
Mr Tulloch’s First State Asia Pacific Leaders fund currently has 24.7 per cent in India, by far the biggest country weighting and a large overweight position compared to the benchmark index, MSCI AC Asia Pacific ex Japan, which has a 7.2 per cent weighting to India.
But the managers said high demand had pushed many companies to excessive valuations, including many of the stocks that First State owns.
However, First State’s Asia Pacific managers said they would not reduce their exposure to India just because of valuation concerns due to “the high-quality companies which the country offers”.
But the Asia Pacific ex Japan fund, like all the funds in the First State Stewart stable, has a high level of cash because managers can’t find quality companies at reasonable valuations.
On the First State Indian Subcontinent fund, the managers said their positions in “consumer companies are the lowest they have ever been in light of very high valuations”.
“We do not expect people to consume more toothpaste or hair oil just because of the election of the Modi government.
“But valuations, having doubled in the last year, are suggesting exactly that.”
The managers warned that, in spite of reducing some holdings, the companies in the fund were still “fully valued” and “are likely to underperform on a relative basis in the near term”, but the managers stood by their long-term prospects.
“Our cash position remains high and we are happy to wait on the sidelines for some of our favourite companies to become more reasonably valued,” they added.
