The Ashburton Indian Equity Opportunity Fund celebrates its 6th anniversary in September. Over that time we have witnessed a weak government being replaced by a strong one, an economy hit by a domestically generated downturn that is now only recovering and a stock market that despite bouts of volatility continues to climb to new highs.
Fund activity
We undertook very little trading activity in August, with no new stocks added or existing positions sold. We did reduce our weighting in Dixon Technologies to a 1.5% unit size to reflect continued risks around Indian mid and small cap stocks. Currently we are sitting on a slightly larger cash position than we would usually hold as we await opportunities to add to existing positions in any possible market volatility.
While Indian equities have posted the best start to a fiscal year since 2014/2015 the same cannot be said about the Indian rupee. The Indian rupee lost over 3% of its value against the US dollar over the month, albeit a move that is in line with other emerging market currencies. We believe recent weakness in the currency is getting somewhat overdone, although we do acknowledge that currency moves in particular do often have a habit of over or undershooting. Performance over the period of Indian export focused stocks has been strong with Sun Pharmaceutical, Infosys and HCL Technologies among Fund holdings doing particularly well.
The positive news to report is that the quarter end June 2018 (1QF19 in fiscal year terms) corporate results season finished with strong revenue growth trends across most sectors. The Nifty index reported robust revenue growth of 17% and 4% YoY net profit growth. However if we exclude State Bank of India and Tata Motors (who had exceptional items mar their results) revenue growth and net profit growth was a healthy 24% and 20% YoY respectively. Indian banks were of particular interest, particularly the more corporate focused banks. Corporate banks posted numbers significantly worse than expected due to regulatory pressure to force more stringent non-performing loan (NPL) recognition. Despite this corporate bank stocks rallied as the market is now believing that the long NPL cycle has bottomed. The Fund is positioned in both Axis Bank and State Bank of India that have been benefitting from recent price action.
Outlook
A revival in corporate revenue growth is perhaps further confirmation that the India economy is finally recovering from the twin shocks of demonetisation and the implementation of the pan-India Goods and Services tax over the last couple of years. The latest quarterly GDP figure of 8.2% growth for the June quarter was much better than expected, and appears to vindicate the recent increase in interest rates from India’s central bank, the Reserve Bank of India (RBI). The RBI was at pains to stress that the economy was recovering and that the long present output gap was rapidly closing. Whilst we still believe that there are segments of the economy struggling (for instance the property sector), if the output gap is indeed closing this should be good news for corporate pricing power and thus earnings and investment. A fully fledged investment cycle is the final piece in the jigsaw that would dispel any lingering doubts about India’s growth outlook.
Reflection: six years on
September marks the sixth anniversary of the launch of the India Equity Opportunities Fund. Much has changed over the years. When we launched the Fund we could not have anticipated the election of such a strong, reform focused Prime Minister who came to power as a result of his grasp of the popular discontent and frustration felt by the younger sections of society. Prime Minister Modi ran ground-breaking campaign that must have not gone unnoticed by members of President Trump’s team some years later.
Over the last four years Modi’s government has implemented reforms that most thought essential but impossible to enact due to political weakness at the centre. Of particular focus have been financial inclusion measures that have been aided by focus on digitalisation and formalisation of the economy. The roll-out of the Pan-India GST is the most far reaching tax reform since independence, and will further push the formalisation of the economy. Crony capitalism has been attacked by the new bankruptcy code which makes corporate default resolution faster and more efficient, and other measures have been implemented that make it harder to invest illegal money into the economy. We have also seen the adoption of an inflation targeting regime, which we believe has, and will, continue to have profound implications for inflation and household savings patterns.
Reforms do however usually come with a short term cost, and in this case growth over the last six years has disappointed, as reforms have caused disruption. The reform process has, however, not finished and we still need significant changes to land and labour laws in particular that would set India on an even stronger path. As we head towards the general election next year, we believe growth will continue to gradually recover, with positive ramifications for corporate earnings.
The one thing that has not changed over the last six years is the quality of Indian corporates. We are constantly surprised at the depth of quality of Indian management teams and their grasp of the huge opportunities available to them and their shareholders. India, in our mind remains one of the most compelling investment opportunities globally.