India’s stock markets might have taken a beating recently but local fund managers are not letting the doom and gloom from developed economies get them down as they remain bullish on the long-term Indian growth story.
Markets have been hit by foreign investment outflows from Indian equities totalling Rs23.5bn ($470m) this year as repeated interest rate rises threaten growth and global headwinds continue to blow from the eurozone crisis and a slowing US economy.
“The kneejerk reaction of foreigners will be to sell all ‘risky’ assets and they will sell India,” says Ajit Dayal, chairman of Quantum Asset Management. “Therefore the markets are exposed to near-term downside risk [but] for long-term value investors, this sell-off is a buying opportunity.”
With India’s economy more dependent on domestic consumption than exports, sticky inflation and interest rate rises pose greater concern to the nation’s growth than the flight of risk-averse global capital. If India can weather these challenges and the volatility in the global economy, it will maintain its appeal as one of the most promising markets for global funds.
The benchmark India Sensex 30 index turned in its worst quarter since 2008 in the three months to September 30, when it dropped 13 per cent.
Following a 52 per cent slump in 2008, India’s $1,200bn stock market was the best performing in the world in 2010, with a record foreign inflow of $29.4bn, before the reverse in the third quarter.
India’s economy is also coming under pressure after recovering strongly from the 2008 crisis. Following 8 per cent gross domestic product growth in the year to March 31, the government earlier this year predicted growth of around 9 per cent for this fiscal year.
But on Wednesday Pranab Mukherjee, the finance minister, said he now expects the economy to grow more slowly due to pressures from inflation and interest rate rises.
“Most of us are expecting India’s growth to go down below 8 per cent. This is disappointing,” Mr Mukherjee said at a press conference.
India’s food inflation exceeded 10 per cent in early October while the benchmark wholesale price index has remained higher than 9 per cent since last December. The Reserve Bank of India has made tackling inflation its priority and is expected to announce a further rate rise to 8.5 per cent on Tuesday, having raised rates 12 times since March last year.
Manufacturing has felt the squeeze the most with India’s industrial output growing a less-than-expected 4.1 per cent year-on-year in August.
The near-term risk has some led some fund houses to focus on balanced funds. Axis Mutual Fund, a domestic fund manager, recently closed its Axis Hybrid fund that had raised almost $100m and was designed to protect against downside risk through fixed income portfolios, while also allowing investors to participate in any market upside through option structures.
Rajiv Anand, chief executive officer of Axis Mutual Fund, says he has also seen inflows into another more defensive fund, the Axis Triple Fund, which has about $120m of assets under management. This fund focuses on a conservative mix of equities, fixed income and gold. “Given the fact that over the past year gold has done spectacularly well, the performance of this fund has been really good,” says Mr Anand.
Like Axis, fund houses across the industry are taking strong positions on gold. “The reason for bullishness for gold, frankly, is fear and bearishness about other asset classes and currencies,” says Krishna Sanghvi, head of equities at Kotak Mutual Fund.
Quantum Asset Management’s Mr Dayal says the fund house has been able to weather the macroeconomic pressures and attract new investor inflows by sticking to the company’s bottom-up stock picking approach.
“A good management stuck in a bad business cycle will always get capital and live to fight another day – though the cost of that capital may increase,” says Mr Dayal.
According to Mr Anand, quality stocks are getting more expensive in this environment but Indian equities in general are attractively valued with investors likely to get good returns in the next 24 to 36 months.
Kotak’s Mr Sanghvi says price-to-earnings ratios are reasonable at roughly 15 times forward earnings but should become more attractive next year with the fund house expecting interest rates to top out in the next three months.
“Six months down the line, we expect that broadly inflation will have already peaked, the RBI will have called a pause and then we will expect the rate cycle reversing from there on,” says Mr Sanghvi.
Moody’s Analytics also forecasts that the India growth story will roll on. “We expect GDP growth of 7.4 per cent this year and next, still a healthy rate of growth given the global economy’s deteriorating outlook,” said Glenn Levine, senior economist with Moody’s Analytics, in a recent report. “With … multi-year [public and private investment] projects coming through and domestic confidence holding up, it is difficult to foresee a hard landing.”
The greatest concern to all three fund managers is that India’s policymakers and investors do not become fixated only on the growth number but also concentrate on the quality of that growth and whether it is leading to widespread sustainable wealth creation. India has been rocked this year by political corruption scandals amid concerns that growth is inordinately benefiting the top echelons of society.
“I would prefer a growth of 6 per cent per annum which is more broad-based,” says Quantum’s Mr Dayal.
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