The “short-term catastrophe” of Indian demonetisation has given Stanhope Capital chief investment officer Jonathan Bell a chance to up exposure to the region in his firm’s portfolios.
The initiative, which began in November and entails nullifying the majority of the country’s currency in an attempt to thwart black market activity, encountered setbacks in part because of an inadequate supply of replacement money.
However, Mr Bell added to a position in Lyxor’s Ucits MSCI ETF India product in reaction to the change, claiming that while it had dealt a blow to the economy, the region remained attractive on a longer term view.
“We added to Indian equities just after the demonetisation,” he said. “Clearly it was a short-term catastrophe for the economy in many areas, but it was difficult to think how that would become a long-term issue.
“The fact that they didn’t print enough money to replace the notes they took out of circulation was only ever going to be a short-term hit to the economy.”
He added: “India is growing at 7.5 per cent per annum. Also, the Indian economy is quite similar to the US economy in that it’s very domestic. If you have a crisis in China or the US, it should be able to carry on.”
Another recent change has been an increased allocation to commodities, led by both an improvement in the oil price and a broader change in the economic outlook, as cyclicals come back into favour and inflation expectations return.
“If we see inflation pick up, commodities are beneficiaries,” said Mr Bell. “There’s been a restriction in supply with Opec cuts – that has led to oil bouncing over $50 (£40). We think that should be sustainable.”
The move, which saw Mr Bell increase a position in a Schroders commodity fund, is not the only time he has adapted to a market rotation in recent months. He was an early adopter of the rotation from growth to value investing witnessed last year.
Early in 2016 he sold out of Terry Smith’s Fundsmith product, citing concerns the tide could turn in favour of value-centric approaches at the expense of “quality” companies. Demand for the fund was strong last year – with nearly £3bn of net sales – but some questioned whether performance could be sustained in the £9.1bn vehicle after the change in sentiment.
“We switched out of his fund, thinking there should be a switch from quality growth having done so well to a value-style approach,” said Mr Bell.
As part of the shift, money was then deployed into two iShares Edge Value ETF products taking a US and global approach, respectively.
Mr Bell has also favoured funds buying stocks that are less exposed to a style rotation, such as the Wellington Durable Companies offering.
“It looks for businesses that have quality earnings but are not quite as quality as Terry Smith-type holdings,” he explained. “It’s quality in terms of high earnings but lacks earnings growth. Because of this, we are paying half the multiples.”