Summary

• Following a strong couple of months of performance, mainline Indian indices suffered some profit taking in November. Mid-cap indices continued to outperform, reflecting continued strong domestic participation. Domestic liquidity has been behind a record initial public offering boom year to date. More than US$10bn has been raised so far this year, with the insurance sector representing the bulk of deals.
• The latest GDP data showed a much welcome pickup in growth following disruption from the implementation of the Goods and Services Tax (GST) and the longer impact from demonetisation. Manufacturing and investment spending were particularly strong. While the recovery was predicted by economists, growth was slightly light compared to expectations.
• The Fund posted a positive return of 1.5% compared to the benchmark falling -0.7%. Some of our recent additions performed well on the month.

Fund activity

The Fund was again active making two new purchases. Following announcements from the government late last month over public sector bank recapitalisation we have made a slight change in focus. We have added the first public sector bank for many years, buying the State Bank of India: the best positioned and undisputed leader of the pack. We expect to hear continued news flow from the government to clear the lingering non-performing loan (NPL) issues that public sector banks in particular and corporate banks in general have been suffering. While resolving the NPL problems will undoubtedly take further time, we believe that from a risk/reward perspective having exposure to specific public sector and corporate banks looks compelling.

In addition we have added a very small initial position in India’s dominant low-cost airline, IndiGo. Structural growth stories in India are trading at heady valuations, and while there are plenty of critics of airline stocks globally, we can find few opportunities in India where we see massive structural growth (upside in air transportation due to very low penetration) trading at reasonable valuations. IndiGo, was listed in late 2015 and dominates the market today as India’s lowest cost operator.

Outlook

We are now hopeful that the road to a final clean-up of India’s banks is much clearer. The NPL issue has been a key factor holding back growth over the last few years, albeit not the only one. The recapitalisation is a significant move that cannot be underestimated, although we expect further actions from the government in the months ahead. What is clear however is that we have already seen a pick-up in bank credit growth over the last couple of months. While that is too short a period to extrapolate a trend, we do believe that we are on the cusp of a revival in bank credit growth which should benefit the corporate lenders relatively better than the much higher rated consumer facing banks. For that reason we will be favouring banks and corporate banks in the period ahead.

One of the most common concerns on India amongst foreign investors remain valuation. While there is no doubt that valuations on current earnings look extended, we remain hopeful that the recent earnings season represents the trough. With the negative impact from demonetisation and GST now behind us, the low base for both economic growth and earnings leaves plenty of room for surprises. Add the overriding growth objective from the government in the lead up to the election in early 2019 and we remain comfortable with India’s outlook.