The fund underperformed its benchmark in June, primarily due to our multi-cap approach where we focus on the quality and opportunity of a business rather than its market capitalisation. This approach has worked well in India but with the recent stark underperformance of mid/small caps the Fund is lagging. The factors that have led to this indiscriminate sell-off in this area of the market (primarily domestic investor nervousness due to rising crude oil and political uncertainty over next year’s election) could continue for a little time longer. For that reason we have been active in June in slightly repositioning the portfolio.
We have sold three smaller cap stocks (Ashoka Builcon, Gateway Distriparks and Ramco Cements) and bought HDFC Bank and Future Consumer. Both Ashoka and Ramco have been successful positions and remain well run companies. While there are specific reasons for our decision to sell, more broadly we are concerned that as we approach the national election next year, the government will at the margin turn its focus away from physical infrastructure investments to more soft policy options aimed at the rural population. Rural incomes have been under pressure for a few years and the government is trying to address this issue with various policy options.
We added both HDFC Bank and Future Consumer to the fund. HDFC Bank is India’s pre-eminent private sector bank, yet still has a huge opportunity to expand its market share profitably in the years ahead. Future Consumer is a relatively new company that is part of the large retail focused Future Group. Future Consumer is a disruptor in the consumer staples space that offers very high growth potential via both the retail network of the Future Group and other channels with its asset light, multi-brand strategy.
Although the macro outlook has slightly deteriorated, we are more comfortable that India’s growth outlook continues to improve. Economic activity remained strong in the latest data with the key positive robust growth in auto sales, uptick in foreign trade (oil and ex oil) and uptick in credit growth. The key negative was rising inflation and muted rural wage growth.
Early in June, the RBI increased the repo rate by 25bps to 6.25%. While we consider this move somewhat premature in relation to India’s underlying macro fundamentals, we appreciate that international factors played a large part in this decision. More importantly, we see the action as confirmation that growth is recovering and becoming more entrenched for the first time in years.
This improving Indian growth outlook contrasts with wider global growth concerns that have resulted in sentiment and flows to emerging markets deteriorating. During the three month period from the beginning of April 2018, foreign investors sold US$2.9bn of Indian equities, an amount not exceeded over this quarter since 2008. Foreign ownership levels of Indian equities are now at levels not seen since 2011, with focus firmly elsewhere. Domestic investors, on the other hand, have proved more resilient, with domestic flow remaining positive throughout this year, after a record year in 2017.
While foreign outflows might continue longer due to global risk aversion, we find this situation bullish as we believe India will stand out as a relative growth beacon in the years to come. In addition, India’s market beta has also dropped to multi-year lows, setting the stage for a recovery in the period ahead.
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