Conal Gregory, AIC Regional Journalist of the Year, looks at India for a successful investment.
With mature economies continuing to report lacklustre performance, the focus for savers looking for growth has moved to emerging nations. India is the obvious choice.
It is the largest democracy in the world without the risks inherent in China and boasts a relatively stable political backdrop for investing.
In the last decade, economic and financial power has moved from the West to East and India has been part of that transition. Its growth levels have recently slowed as a result of last year’s monetary tightening but it remains very impressive relative to developed economies.
Its stock market is becoming increasingly broad but is unrepresented by indices, given the contribution of the country to global growth. Its fluctuations this year partly reflect the unfolding eurozone debt crisis.
Part of the recent slow growth – down to 5.3 per cent which is the lowest for seven years – and weakness of the rupee can be blamed on the lack of political direction. However, the Prime Minister, Manmohan Singh, has now taken control of the Finance Ministry, which is a move greeted positively by the stock market.
The Reserve Bank of India last month forecast GDP down from 7.3 per cent to a still impressive 6.5 per cent but warned that inflation could reach seven per cent. In 2003-2008, the pre-Lehman era, it achieved nine per cent plus annual growth.
India is still the world’s 11th largest economy despite being the second most populous with an active labour force of almost 500 million.
Investec Wealth & Management in Leeds notes that India operates on “relatively low levels of debt with the potential for aspirational purchases, such as cars, which should provide future domestic opportunities”.
The firm favours exposure to India through a fund like Templeton Emerging Markets or First State Global Emerging Markets Leaders as they offer the flexibility to exit if value is not there. If a specific fund is required, JP Morgan India Investment Trust is favoured.
The fund manager for Jupiter India, Avinash Vazirani, says that Indian equity valuations are attractive on aggregate, adding: “Long-term economic fundamentals remain strong in India and we expect future growth to be driven by increased competition as inflation retreats and monetary policy is relaxed.”
The fund, running four years, has attracted £228m and is deliberately overweight in the consumer goods sector and in banking as Vazirani believes that fears of a significant increase in non-performing loans are overplayed. Healthcare stocks are also significant.
India’s potential labour force is larger than the US and China combined, says Matthew Bennett, international fund manager at NFU Mutual. He adds a word of caution: “It will only reap the benefits if it vastly improves access to education.”
He is currently underweight on India owing to its “poor infrastructure, bureaucracy and sticky inflation”.
Power failures crippled the country last week and clearly the country suffers from a generation capacity shortfall. At peak times, electricity demand is a fifth higher than supply.
Redmayne-Bentley stockbrokers in Leeds advises against single equity purchases owing to high risk and a lack of information, preferring a collective, such as New India Investment Trust.
Lipper has compared funds over five years specially for the Yorkshire Post. The top performers are:
• First State Indian Subcontinent, up 63.2 per cent;
• Aberdeen Global Indian Equity Acc, up 47.9 per cent;
• Danske Invest India A, up 46.3 per cent;
• New India Investment Trust, up 41.9 per cent;
• Pinebridge Global Funds India Equity A, up 36.8 per cent.
Comgest Growth India, Franklin India and BNP Paribas LI Equity India were close behind with the first two denominated in US currency.
The manager of top performer First State Indian Subcontinent, David Gait, seeks innovative companies with a competitive advantage, pricing power and generally sustainable cash flows. He favours firms with low debt. Marico, a leading consumer products company, is the fund’s largest holding. Recent purchases include utility Tata Power and telecoms specialist Bharti Airtel.
The First State fund outperformed the MSCI India index by 65 per cent in the last five years.
In view of the volatility, discount brokers Chelsea Financial Services recommend regular savings as the preferred route. They note India’s good natural resources and that once the right infrastructure is rolled out, the country can become self-sufficient and even export. They tip Fidelity India Focus and Jupiter India.
With over 3,500 quoted firms in India, there are many opportunities for patient investors to buy high growth businesses at attractive prices. India is also a very under-researched market which means that companies with surprisingly large capitalisations that would attract attention elsewhere are not fully analysed for their potential.
This makes India an excellent market for stock pickers over those who simply follow a weighted index. Look for a manager with conviction who builds up a large position and runs with it for a long time to gain growth benefits that are later reflected in the market.
Jonathan Baker, at Leeds-based Charles Stanley, favours Aberdeen Global Indian Equity, Jupiter India and JP Morgan Indian. They have also purchased a Jaguar-Land Rover bond for clients, paying 8.125 per cent. This is a high return considering the firm is backed by Tata, the Indian conglomerate. It is already showing a substantial capital gain.
Martin Payne, Leeds director at stockbrokers Brewin Dolphin, acknowledges that investors in India recently have had a difficult time but that “longer term attractions undoubtedly remain” for the country.
He tips Jupiter India which holds a relatively concentrated portfolio of 50-60 companies at any one time. The annual management fee is 1.5 per cent.
Mr Payne also favours JP Morgan Indian which was launched in 1994 and has attracted £441m. Financials represent its largest sector with IT and basic materials holding significant positions. Over 10 years, this investment trust has returned 489 per cent. Its annual charge is only 1.2 per cent.
If a relatively new launch appeals, look at Baring India which started in December, part of whose focus is on high quality banks which enjoy low funding costs.