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The inside story

Inflation concerns, increased market volatility and recent geopolitical events and natural disasters have taken some of the shine off the India story. But this may be a fickle and short-term idea as managers invested in the region look decidedly upbeat.

According to Financial Express data, over the three months to March 31, offer to bid, all India portfolios in the IMA specialist peer group made losses, the worst dropping by more than 15 per cent.

The picture is a bit more mixed over one year to the same end date, with six portfolios in negative territory and six making gains. The latter includes portfolios from JP Morgan, Invesco, Fidelity, First State and Aberdeen.

The longer-term picture is bright and all 12 single-country India funds in the IMA’s specialist sector show significant double-digit gains over a three-year timeframe.

According to Jupiter India fund manager Avinash Vazirani, the escalating tensions in North Africa and the Middle East – and the resulting rise in oil prices – could prove problematic for India as a net importer. However, he argues the country’s recent Budget has been a real positive.

He says: “It confirms the government’s plans to allow people to withdraw subsidies directly via a biometric ID scheme. Not only will this increase the consumer power of the poorer parts of the population but it will also boost the need for basic financial services such as bank accounts and cash machines.”

Vazirani is not alone in his positive stance on India’s biometric identification scheme, with many believing the project bodes well for the country’s poor and will lead to an uplift in both savings and expenditure.

Similar programmes attempted in the UK and US in the past were criticised for their ’big brother’ nature but while earlier forays were based around security issues, India’s goal is to better enable the distribution of social benefits.

The plan is to use ID numbers to link payments of several government-sponsored schemes, such as food subsidies. It will also link to India’s national rural employment guarantee (NREG) scheme, which provides those enrolled with 100 days’ work at minimum wage.

David Cornell of India Investment Partners and manager of the Aim-listed India Capital growth fund notes that absence of identity often prevents the poor from accessing the very welfare programmes created to help them. He says NREG helps to lift the minimum wage, gets money to those who need it, reduces migration to urban areas and gives many women financial freedom. In turn, these people add to the consumer power in India.

For example, says Cornell, more women in India are buying scooters as they become financially empowered. Meanwhile, consumer spending trends are moving from unbranded to branded products.

A large proportion of branded goods remain unaffordable for many but producers are expanding their market by producing miniature versions of branded goods to sell at more affordable prices.

In the belief that the government’s Budget measures and continued support for the ID scheme is positive for India, Vazirani is currently biased towards financials and consumer goods, both of which he sees as set for continued growth.

He says: “We believe interest rates will rise – but less than market expectations – and the rupee will strengthen. Government long-bond yields have already fallen by 25 basis points following the Budget.”

India Capital growth fund chairman Fred Carr says India was an attractive investment destination for most of 2010, with substantial net inflow of foreign institutional investment towards the region. However, at the tail end of the year and into 2011, sentiment on the region was knocked by corporate governance and inflation concerns.

Gemini MOSt India portfolio manager Manish Sonthalia says there remain upside risks to inflation estimates for the region. Towards the end of March, primary inflation inched upwards as cereal prices rose rapidly and vegetable prices increased, with tomato, peas and cabbage all experiencing high inflation.

That said, Sonthalia is positive on the country’s financials sector. Loan growth is 23.2 per cent year on year and loans in absolute terms rose sharply at the end of March. Deposit growth increased to 15.6 per cent heading into April and increased government spending and lower than expected net government borrowing are positives for domestic liquidity conditions.

Cornell also says growth in India’s working population is expected to lead to an increase in the country’s savings ratio to close to 40 per cent over the next few years. In addition, the government intends to gradually lift existing restrictions on the inflow of foreign capital to the country.

He says this move comes at a time when other emerging economies are taking an opposite tack. “These trends should enable India to grow its GDP in excess of 10 per cent for a sustained period, creating numerous opportunities for investors in the areas of consumption with a domestic focus, in financial services and infra- structure development.

“It is this rapid growth that continues to make India an attractive investment opportunity for overseas investors, especially in the environment of continued sub-par growth in the developed world.”

Cornell says that with so many external pressures and concerns, investors will likely remain cautious on the region beyond the short term. However, he says: “All these are near-term issues are part and parcel of equity investing. They should not detract from the extraordinary investment story India has become.”

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