After enthusiasm following prime minister Narendra Modi’s election in 2014, investor sentiment towards India then waned as reforms proved challenging.
This year, however, the winds have changed again. Initial expectations around the speed of reforms may have been unrealistic, but there are signs things are progressing.
The Indian parliament passed more bills in 2015 than it has done in years, and the country improved modestly in The World Bank’s annual ease of doing business index (though it still only ranks at 130 in a list of 189 economies).
In terms of value, Indian equities are never ‘cheap’ relative to other emerging markets, but they are currently trading roughly in line with their longer term average on a forward price-to-earnings basis. More to the point, however, according to Prashant Khemka and Hiren Dasnai, managers of the elite-rated Goldman Sachs India Equity Portfolio, India has plenty of further upside potential.
If we are at the start of a multi-year earnings growth cycle – something several fund managers I’ve met recently are predicting – then valuations could prove attractive.
One advantage the Indian economy has is that it is less exposed to slowing global growth (and to China) than many other Asian and emerging markets. Its domestic demographics – including an enormous, educated middle class – are unbeatable. With this fast-growing pool of workers and consumers, India could indeed be on the verge of big(ger) things.
Mr Dasnai says the Goldman Sachs Asset Management India Equity research team is focusing on domestic-oriented sectors such as industrials, cement, financials and consumer discretionary. Yet they are also finding interesting opportunities in select export-oriented sectors such as IT services, healthcare, textiles and chemicals, he notes.
While India has seen promising shoots of recovery before, the breadth of economic indicators and sectors picking up this year suggests a widespread trend.
One of the country’s greatest challenges is a lack of infrastructure. Lower commodity prices have been a boon for the Modi government’s raft of proposed projects, bringing down construction costs and boosting project numbers.
Inflation is something to keep an eye on. Although it has come down more than 2 percentage points since Mr Modi came into power, last month’s 5.8 per cent is at the top end of the Reserve Bank of India’s comfort level. It is hoped lower commodity and food prices will keep inflation muted.
That said, both managers are bottom-up stockpickers, which is what has driven the fund’s success. Although it invests across the market capitalisation spectrum, it has consistently been overweight mid- and small-caps, which have proved fertile hunting grounds for alpha generation.
The managers aim to reduce stock-specific risk by being well diversified and the portfolio has 80 to 90 holdings. Based in India and Singapore, the research team takes on an exhaustive number of company meetings year-round.
The Goldman Sachs India Equity Portfolio has achieved total returns in sterling of 94 per cent since launch in March 2008, compared with 45 per cent for the MSCI India Investable Market Index. Given the in-house resources available, there’s no reason why this fund shouldn’t continue to achieve superior returns.
Darius McDermott is managing director at FundCalibre
