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Is India the jewel in the emerging market crown?

While the respective developing market powerhouses of Russia, China and Brazil are enduring their own sets of economic woes, optimism over India being the real jewel in the emerging market crown is firmly on the rise.

A pro-growth Budget unveiled at the end of February, the first from the Narendra Modi-led BJP party, was swiftly followed by the second surprise interest rate cut of 2015. Together they conspired to drive India’s benchmark BSE Sensex index through the 30,000-barrier for the very first time.

Bolstering the upbeat mood was Finance Minister Arun Jaitley’s forecast that GDP growth would go from 7.5 per cent in Q4 to 8 or even 8.5 per cent over the next 12 months and thereafter move into double-digit territory.

The market, however, has already been kind to investors, with the MSCI India index up by 53 per cent in the 12 months to 3 March, according to FE Analytics. During the period Indian focused funds have achieved even higher returns, with Jupiter India up 74 per cent and Franklin India 72 per cent ahead.

But while Indian equities are on a roll and its newly elected government is making all the right noises, advisers and fund pickers are not lining up to pile in and prefer to maintain exposure via broad funds. F&C co-head of multi-manager Gary Potter is a case in point, although he says allocation to India has been generally on the rise across emerging markets portfolios anyway.

Fidelity South East Asia fund manager Teera Chanpongsang is maintaining a high conviction in India as he believes there are many quality companies positioned to capture the “structural changes of economic potential in the years to come”. 

He says: “A recovery in economic growth is expected to be underpinned by improving investment cycles, strong domestic consumption and ‘ease-to-do business’ government initiatives.” 

Potter believes India, given its population of 1.2 billion and rising, has “huge potential” and says the new administration is probably “the best chance it has to join the new world order”.  The fact that it is a net importer of oil is also a major boon for the country, given the collapse in crude prices.

Despite the backdrop, concerns do remain. Potter says: “India has history of unstable politics. It is a country with an awful lot to do still. This is a 10-year plus story, and there will be bumps along the way.”

Rowley Turton director Scott Gallacher adds: “The issue with emerging markets is it is not about just getting in at the right time but getting out. A few years ago Brazil was the place to be but then it got hit.”

The market euphoria has generally held steady since Modi was named prime minister in May, in what was the world’s largest ever election in terms of votes. The 800 million-plus electorate brought in what has been hailed as the country’s strongest government in 30 years. The shift was dubbed a game changer as, after enduring decades of politicking, bureaucracy and feeble progress, the BJP promised to bring in sweeping reforms to rehabilitate India’s economy.

Neptune head of Indian equities Kunal Desai says the BJP has a “once in a generation opportunity” to redirect fiscal spending towards a growth-enhancing infrastructure push – especially given the drop in oil price.

There was good evidence of a shift in this direction too, with finance minister Jaitley declaring in his budget there would be a doubling of road spending and that rail investment would rise a significant 30 per cent.

Desai also cites the relaxation of the government’s fiscal goals, where it opted for a 3 per cent fiscal deficit target in three years rather than two, in a bid to help stimulate growth through enhanced spending. “Further, corporate tax will be lowered to 25 per cent from 30 per cent over a four-year period,” adds Desai.

New Horizon Investments chief investment officer Madhav Bhatkuly believes the budget has “a solid foundation for sustaining economic growth” and that India is in a sweet spot. He says: “The country is in the throes of political change that will make it much easier to conduct business. I believe that this, coupled with low fuel prices and a subsequently improving trade deficit, should lay the foundation of a multi-year bull market.”

Charles Stanley Direct head of investment research Ben Yearsley says while he bought a lot of India last year, he has held off from topping up more recently.

He says: “Presently there is a lot of promise in the price. But Modi needs to deliver on his promises over the coming years. I am a big fan of India from a long-term perspective but I do not see the need to rush in today. “

Axa Wealth head of investing Adrian Lowcock echoes Yearsley’s views. “A shift is taking place,” he says.

“I believe the potential for India is still considerable given its very young and rising population. But because of the recent market rally I would be concerned that a correction could take-place – and in emerging markets, corrections can come out-of-the-blue. My advice is to perhaps drip-feed in some cash as Modi’s promises still need to be delivered.” 


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