Last year’s General Election euphoria proved short lived, at least for the equity market, and 2019 was a tough year for active managers on the subcontinent.
Scandals in the property and banking sectors haven’t helped investor sentiment either – the defaults of DHFL and IL&FS are worth noting. This caused capital markets to freeze up, starving companies of investment cash.
A few asset managers spoke to James Gard and some snippets from the conversation are mentioned below.
Kristy Fong, manager of Aberdeen Standard Indian Equity fund
Uncertainty around India's general election last May made for a tumultuous year as shares surged, then fell, then rallied again. Modi's reforms have been “painful and disruptive” so far and have yet to fully bear fruit. Having said that, 2019 seems to be the turning point for corporate earnings and the wider economy. The stock market should be calmer through 2020.
The great thing about India is there is a huge variety of companies. Because of the dominance of big names like Reliance and HDFC, smaller and mid-cap names are often not on the average investor’s radar.
Cement companies may lack glamour, but they tap into the expected boom in Indian construction over the coming decades. Affordable housing is a key tenet of the Modi government’s pitch for “inclusive growth”; in 2015, he promised that by 2022 every Indian would have access to a brick and cement house. While this is some way off target in many states, it's a target that suggests Modi's ambition.
The construction sector, despite recent problems, is a rare example of where government incentives and the private sector are aligned.
Stocks:
- India’s property firm Prestige Group, cement firms UltraTech and Goodrich.
- Internationally focused firms like Tata and Infosys have low debt and strong cash flow; unusually for large Indian companies, they pay a decent dividend too.
Vinay Agarwal, manager of First State Indian Subcontinent fund
The new Goods and Services Tax, or GST, is an example of a painful reform. It has been a nightmare to implement, caused financial distress for small business (many of whom are having to pay tax for the first time), but will boost tax revenues in the long-term and eventually lead to better oversight of India's many companies. The Indian economy is getting close to the bottom of the cycle.
Stocks:
- Ambuja Cements and Heidelberg, to take advantage of the long-term trend for construction growth.
- Agarwal has high hopes for Bharti Airtel because he thinks consolidation in the telecom sector will allow providers to hike their charges. Data charges in India are currently lower than in sub-Saharan Africa, despite the country having the highest data usage per smartphone in the world.
- Air-conditioning is still yet to go mainstream in India; his pick of the sector is Blue Star.
Hiren Dasani, manager of Goldman Sachs India Equity Portfolio fund
Economic indicators are already suggesting the recovery is now underway. External factors like a softening oil price can also help prop up this recovery, as India's economy is heavily dependent on oil imports.
Stocks:
- The telecom sector, as the market can easily absorb price rises.
Things to note
- The top 5 stocks of MSCI India index (RIL, HDFC, Infosys, ICICI Bank, TCS) make up around 39% of the 84 stock benchmark.
- RIL's shares climbed more than 17% last year and are up more than 200% over the past five years. Helped by RIL's growth the MSCI India rose around 10% in 2019. That means managers without the same high exposure to the stock can start to lag the index.
- From an ESG perspective, active managers may have an advantage over index trackers. Governance, the third pillar of ESG investing, is a perennial hot topic in India, particularly as many companies are owned by powerful founding families. Intricate ownership structures, with conglomerates controlling large and sprawling empires, make oversight difficult for overseas investors. And index investing makes it hard to avoid a scandal-hit company.
- Many fund managers are positive about Modi's reforms in the longer-term, but argue that investors will have to patient to see them through.
