The appointment of former IMF chief economist Raghuram Rajan as governor of India’s central bank has been hailed as a “bold decision” by emerging markets managers.
But weakness in the Indian economy – particularly regarding its currency – is likely to continue, managers warned, as markets test the policies of the government and central bank.
Sam Mahtani, manager of F&C’s $82.2m Global Emerging Markets Portfolio fund, praised the appointment of Mr Rajan – who is credited with having predicted the 2008-09 financial crisis – but warned of further currency weakness hitting the economy in the near term.
“The currency is challenged – it has depreciated 12 per cent in the year to date and this will feed through to higher inflation,” the manager said.
“The market might challenge and test [the central bank] but, at some point, it will accept that it is serious about stabilising the currency.
“This is a really critical period for India. Growth is slowing and the country needs interest rates to come down.”
Polar Capital’s William Calvert said he had sold down his exposure to Indian financial companies following the central bank’s tightening actions because “you cannot kill bank lending and expect your economy to grow”.
Mark Williams, manager of the £17.2m Liontrust Asia Income fund, said there were unlikely to be any more major policy changes until the next election, which is due to take place before May 2014.
Negative sentiment in India has been driven by its deficits, weak currency and high inflation of around 9 per cent, and these make the country even more vulnerable to external shocks and capital flight by foreign investors, according to Mr Williams.
The Indian stockmarket has been one of the worst performing markets in recent years and the MSCI India index has underperformed the wider MSCI Emerging Markets index, dropping by 43.1 per cent in three years.
Some managers have claimed Indian companies were overvalued in spite of these falls, however Mr Mahtani argued that there was still “a decent amount of upside based on our calculations of fair value”. He cited HTFC Bank as an example of an expensive stock that would nevertheless continue to post a high level of return on equity for the next few years.
Leon Eidelman, manager of the JPMorgan Emerging Markets fund, said he had a high weighting to India in his portfolio because of what he saw as a long-term upside.
But Liontrust’s Mr Williams said that while there were many well-managed companies in India, he had yet to find companies on low enough valuations to buy into.
