Summary

• October ended with an announcement from the Finance Ministry declaring a recapitalisation of the public sector banks, to the tune of US$32bn, crucial to improving access to credit for small and medium enterprises.  Coupled with this, the government disclosed the largest ever investment in road infrastructure, with US$120bn to be laid out in the next five years.  These efforts show Prime Minister Modi is advancing a pro-growth agenda in the run up to the national elections in 2019.
• The Fund was up 5.7% in October, while the benchmark was up 7.4%, largely in relation to the end of month rally in the public sector banks, an area the Fund has historically avoided primarily due to the on-going issues relating to their elevated levels of non-performing loans (NPL), which has led to the very need for this recapitalisation. Post the month end, the fund recouped the relative underperformance following a strong open to November.
• The government is trying to address the ongoing fallout from the NPLs generated since the mid-2000s that have been weighing down India’s financial system, particularly the public sector banks. Weak public sector banks have been unable to properly clean up the NPL mess, which has acted as a brake on the recovery.  The infusion should meet nearly 70% of the capital requirements to deal with the NPL issue – enabling these banks to provide capital to key government focus areas of housing and infrastructure.

Fund activity

During the course of the month we sold the entire position of Tata Motors following a bounce back off recent lows.  The weak sterling and perceived slowness in the hybrid space have hampered the company in recent quarters, in spite of new releases such as the Jaguar E-Pace and the new Range Rover Velar. 

We have also cut Lupin, the pharmaceutical company.  This has been an underperformer over the year, and the loss of exclusivity of one of its products further weakens the outlook for the stock, and thus the small remaining position was sold. Following the sale, the stock fell further after the US regulator identified new issues in their production facilities.

Tech Mahindra, an IT stock was also sold over the month having rebounded off recent support levels.  Lower organic growth prospects and greater client risks moving forward, coupled with issues in their telecom segment have resulted in our profit-taking in this holding.

Funds raised were allocated to existing holdings, including the recently acquired Dixon Technologies.  In addition, the fund was successful in securing a much sought after allocation in Godrej Agrovet’s IPO anchor book, which forms part of the formidable Godrej stable of companies. 

Outlook

The recapitalisation and the infrastructure investment clearly demonstrate Prime Minister Modi is advancing a pro-growth agenda in the run up to the national elections in 2019.  Modi will be seeking to ensure momentum begins building in the upcoming state elections in Gujarat and Himachal Pradesh, thus we can expect further supportive measures to follow.

Modi recognises the importance of delivering jobs, particularly in the period running up to the election. Road building is hugely labour intensive and we expect Modi to continue rolling out highly job-creative plans in the coming quarters.  Housing construction is another area that will benefit greatly from further investment, leading to greater employment. We are invested in stocks tied into this theme.

India’s growth path is clearer after this announcement. We have a reformist government that is not afraid to take big decisions and introduce supportive policies to ensure opportunities are captured across sectors. India remains at the forefront of global growth and is capitalising on its opportunity.