InvestmentsJul 14 2016

Matthews Asia’s Asnani not deterred by Rajan departure

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Matthews Asia’s Asnani not deterred by Rajan departure

Matthews Asia fund manager Sunil Asnani has taken a cautiously optimistic view of Indian central bank governor Raghuram Rajan’s resignation, despite investor worries over his early departure.

Mr Rajan was seen as a positive influence on the Indian economy. Having arrived in 2013, he restored credibility to the central bank by grappling with soaring inflation and a currency slump.

But dwindling political support will see Mr Rajan step down in September after three years. Governors are appointed on three-year terms but these are usually extended to five.

The exit could cause issues for the country’s banks. Mr Rajan was instrumental in India’s asset quality and capital adequacy tests for banks, which could now be delayed with a wider effect on private sector growth.

Mr Asnani, who manages the £74m Matthews India fund, has avoided banks because of these capital concerns. But despite the loss of the central bank figure, he remains relatively positive on the stockmarket’s outlook.

The manager feels his portfolio is largely immune to macroeconomic shocks, but can see issues for the country’s currency with Mr Rajan’s departure.

He said: “I think state-owned banks will be affected the most because of guidance reforms. We have not invested in them because we felt it will be challenging to make those reforms. The one possible reproduction could be on the currency.”

The fund excludes utilities, telecoms, energy and state-owned banks as he feels they are too susceptible to market movements and government policies.

Instead, Mr Asnani prefers “well-run banks”, meaning those that are not misreporting numbers or hiding bad assets, and are instead “focused on profitable growth”.

The fund also invests in “non-bank finance companies”, such as housing finance firms and companies focused on personal loans and those to small- and medium-sized enterprises, as he feels they are less affected by India’s residual inflation problems.

Inflation-related issues also led Mr Asnani to sell his fund’s holding in a “Reit-like company”, which he did not feel had strong enough pricing power to be able to raise tariffs in line with inflation.

The manager has also been adding large caps to his portfolio over the past two years, as the previous outperformance of small caps started to correct.

The all-cap strategy holds 53.2 per cent of the portfolio in companies with a market cap of less than $3bn (£2.3bn), 49.4 percentage points more than the S&P Bombay Stock Exchange (BSE) 100 index.

It holds 17.6 per cent in firms worth more than $25bn, 22.5 percentage points less than the benchmark.

Mr Asnani said that small- and mid-cap stocks had traded at a significant discount to their larger peers over the past five years, and the scope for potential growth made them particularly attractive.

But he has begun to see more opportunity in the large-cap space, such as the Indian subsidiary of a multinational food company.

The Matthews India fund has returned 82 per cent over the past three years, compared with the S&P BSE 100 index’s gain of 49 per cent, data from FE Analytics shows.