India Equity Opportunities Fund - February 2019

2019 opens with new beginnings and a new home for the Fund at IIFL. On 29 January 2019 the merger of the Ashburton India Equity Opportunities Fund into the IIFL Indian Equity Opportunities Fund completed. 

• Following significant outperformance over the last few months, MSCI India underperformed both MSCI Developed and MSCI Emerging Market indices in January. Within Indian markets, large-cap stocks posted outperformance versus smaller capitalized stocks.
• All eyes in India were on the 1 February Interim Indian Budget and, as largely expected, the budget focused on populist lines with the general election only a few months away. Most emphasis was on consumption versus investment with the agricultural sector, real estate and the middle classes beneficiaries.
• The latest earnings season has so far delivered a slight beat versus expectations, although we still have some way to go. This was not enough to encourage fresh sizable buying from domestic or foreign investors as other emerging markets benefitted from renewed risk appetite.

Fund activity

On 29 January 2019 the merger of the Ashburton India Equity Opportunities Fund into the IIFL Indian Equity Opportunities Fund completed. Both Ashburton and IIFL are excited about the prospects for the Fund going forward and the additional tools available that should benefit shareholders going forward.

January was a light month for economic data; the most notable data being December’s consumer price inflation (CPI) coming in as expected at 2.19%, down marginally from the month before. The government also released their 2019 GDP annual estimate at 7.2% growth over the preceding year, again offering no surprises. With little to excite markets India fell to a bout of profit taking following a period of outperformance versus both developed and other emerging markets. The V shaped recovery on Wall Street in January and hopes of some sort of trade deal between the USA and China encouraged investors to increase their risk appetite leading to India to underperform (India being a domestic story and a low beta stock market).

The interim budget was delivered largely on expected lines ahead of the general election due within the next three to four months. Consumption has been given a boost with government capital expenditure taking a temporary back seat as the BJP has attempted to boost its popularity amongst the mass of the population.

Outlook

Following from the populist budget delivered at the beginning of February, a few days later the Reserve Bank of India (RBI) surprised markets with a largely unexpected interest rate cut. This more pro-growth agenda from the RBI is set against benign inflationary pressures. We have felt for some time that the RBI had been adopting a far too conservative and restrictive policy against the evidence on the ground. We did however concede that recent rate rises from the RBI probably had more to do with rising US interest rates and the withdrawal of liquidity as quantitative easing was being unwound. Now that the market and the Federal Reserve have changed course somewhat a window was opened for the RBI to recalibrate policy. The RBI and its new Governor will now nevertheless have to tread a more careful course with elections so close.

As we enter the final few months of the Prime Minister Modi’s first term doubts are once again resurfacing and indeed increasing as to the likelihood of his re-election and the success of his party at the polls. It does appear that the main opposition party is reinvigorated following their disastrous showing in 2014, and that alliances amongst opposition and regional parties will take a significant vote bank away from the BJP. Much can and will surely happen over the next few months, with swings in opinion polls and volatility in markets likely to be the norm.

As ever from a stock market perspective the key is not to get distracted with the inevitable short-term noise from an election. India has experienced many such electoral shows before. But the one thing that has remained constant is the quality of the opportunity and companies that India offers.