Emerging market managers are beginning to pare back Indian equity overweights as strong fund flows and market rises lead to valuation concerns.
Indian equities have gained 30 per cent over the past three years in local currency terms, driven by reforms such as the country’s attempts to simplify tax codes and encourage the growth of its finance sector.
The increase compares with a 23 per cent rise for emerging markets and 29 per cent for global equities.
Flows into Indian equity funds have surged in 2017 in particular, Morningstar data shows. UK-domiciled Indian equity strategies have seen net sales of £247m in the first half, following £11m in redemptions for the same period of 2016 and £89m of inflows in the second half of last year.
Specialist asset manager Ocean Dial soft-closed its Gateway to India fund earlier this year, while Jupiter’s India strategy has surpassed £1bn in assets.
Some managers have started to rein in allocations in light of this run. Andrew Gilbert, an investment manager at Parmenion, said emerging market managers favoured by the group had begun cutting back allocations.
“What they appear to be indicating is that while India was a significant overweight last year, because of the movement in valuations it is still an overweight but has been reduced or scaled back,” he said.
“India was possibly the story of last year.”
Parmenion uses funds from Aberdeen, Fidelity, Schroders and Somerset in the emerging market space.
JPMorgan Asset Management fund manager Ayaz Ebrahim also said he had been reducing Indian equity exposure for much of 2017 in his £340m Asian Investment Trust.
“We are still fundamentally very positive [on India], but it’s a question of valuations. We have been top-slicing,” he added.
India’s equity market has again outpaced peers this year, and falling inflation has given the Reserve Bank of India the chance to loosen policy. Last week the country’s base rate was cut to 6 per cent, its lowest level since 2010.
Mr Ebrahim added: “There is a certain extent of money flow [into emerging markets this year] that has picked that up.
“This may mean some stocks have stronger momentum because investors are chasing certain things,” he conceded.
Another factor behind reduced weights to India is a preference for different investment styles, Mr Gilbert noted.
“The fund managers we’re speaking to are suggesting value might come to the forefront for the rest of the year, so they’re looking for more cyclical names,” he said.
“India is typically quality growth stocks, but they are expensive and very well known.”
One manager who typically favours quality stocks is seeking to do more in India.
Last week the board of Fundsmith’s £286m Emerging Equities Trust proposed raising its 40 per cent single country limit.
The trust has 38 per cent in India, but the board said manager Terry Smith was still evaluating a “number of compelling opportunities” in the country.
Jaisal Pastakia of discretionary manager Heartwood said of the Indian market in general: “We believe the equity market may take a pause in the near term, given valuations and moderating economic activity.
“Longer term, we continue to believe the fundamental case remains constructive.”
