A new dawn for India?

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After the recent strong run in Indian equities, is it now time for investors to take profits? Or do India’s new prime minister Narendra Modi’s plans for economic reforms hold the potential for longer-term investment opportunities?

India has been a good place to be invested in 2014 – in fact, it has been the best-performing market globally so far this year.

Data from FE analytics (see below) shows the MSCI India index has returned 17.92 per cent since the start of 2014 compared with 4.12 per cent from its emerging market counterparts on the MSCI emerging market index and 2.28 per cent for the MSCI world index.

Much of the recent outperformance in the Indian equity market has been sparked by the build-up to the Indian general election, which brought with it brighter prospects for economic reform under Narendra Modi, the Hindu nationalist Bharatiya Janata Party candidate. Modi went on to win the election at the start of June.

Since the election, investors’ attention has been focused on the first budget announcement under the new prime minister, made last week, which set out a string of economic reforms designed to boost GDP in the Indian economy by 7-8 per cent over the next three to four years.

Some industry experts are confident Modi can succeed in rolling out the reforms, bringing the potential for both longer-term growth as well as fresh investment opportunities. However, others have urged investors not to get too carried away by the recent flow of good news.

Whitechurch Securities head of investment research Ben Willis currently has direct exposure to Indian equities through some of the more aggressive portfolios at the wealth management firm.

Willis is opting to stick with this level of exposure on the belief that the necessary reforms can come through but says he does not plan to add exposure at the present market levels.

“The key for India is whether or not Modi can deliver on his reforms now,” says Willis. “Given the majority of seats his party won in the parliament he should not face the same level of opposition when trying to push policies through. So the future is certainly brighter.

“While we are not looking to take profits where we have direct exposure to Indian equities within our more aggressive portfolios, equally we are not going to be adding to our position here given where the market has got to.”

Bestinvest managing director Jason Hollands believes there is “a lot to be positive about” for Indian equities against the present backdrop but stresses that investors’ recent enthusiasm could be shaken if Modi’s reforms hit problems further down the line.

“Of course, one of the major risks from here is that expectations are so great that any disappointments or policy setbacks would be ill-received,” he says.

“The Indian market is at an all-time high and with a forward price to earnings ratio of 16.3 times, it is one of the more expensive emerging markets.”

India

Even with the recent improvements in the Indian economy, Hollands believes investing in any emerging market can be risky and recommends that most investors should get exposure to India through a global emerging market fund or investment trust.

He says: “In our view, there is a lot to be positive about but investors need to recognise that investing in a single-country emerging market fund is very high risk.

“Indian equity funds have typically experienced annualised volatility of 20 per cent over the last three years, so these are not for the faint-hearted. We currently rate one such fund: Aberdeen Global Indian Equity GBP. This fund is a concentrated portfolio of circa 30 stocks.”

Kunal Desai, manager of the £51.9m Neptune India fund, says there is “much more to come” from the Indian government’s economic reforms. He believes this makes India a unique opportunity for both growth and investment.

He says: “Clearly the government could not offer the world to everyone but it is worth remembering this is only the first step – there will be a constant drip of reforms over the next 12 months.

“Once again, we anticipate one of the most pro-growth and pro-investment policy calendars seen in Asia in years.”

Desai also highlights a number of sectors that he believes will “benefit disproportionately” from Modi’s reforms, including banks, insurance and e-commerce.

He adds: “Easier lending norms from banks for infrastructure projects will stimulate investment. Raising foreign direct investment caps in defence, insurance and e-commerce will generate foreign interest. The establishment of real estate investment trusts within India will benefit a number of property companies. The huge capital allocation to road development will boost construction companies.”

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