Kate Lin: Welcome to Morningstar Asia Outlook for 2023. My name is Kate. As an asset class Indian equity has been an appealing growth opportunity. In 2022, Indian market was also held back but sliding in a much milder extent. For a market that has outperformed its global peers for some time what should investors look for in a fund? To know this, we're talking to Ramanand Kothari, senior manager research analyst at Morningstar.
Hi, Rama. How has the covered India Equity Fund performed in 2022? What has been the key drivers?
Ramanand Kothari: Hello, Kate. 2022 was a volatile year for India and the rest of the world. Several global challenges, including high inflation, interest rate hikes, the Russia Ukraine war and the fear of recession, all spiked the volatility. Yet the Indian equity market relatively outperformed its emerging market peers and the developed markets. Most of the offshore Indian equity funds under Morningstar coverage had delivered negative returns on an absolute basis, which is broadly in line with the performance of MSCI India Index, though in local currency terms, the domestic NIFTY 50 Index posted a gain of 4.4%. Part of the fund's weak showing is due to the outflows witnessed by the offshore Indian equity funds as foreign investors pulled money from India, a typical case we often see in the risk-off period. Throughout 2022, the stock market reached a new all-time high as a result of robust inflows from domestic investors. The Russia Ukraine war fueled commodity prices, one of the culprits of the higher inflation, and the Indian rupee lost its value against the U.S. dollar as a result of Fed raised interest rates throughout the year.
Lin: So, are these drivers still intact? How have managers positioned their portfolios for 2023?
Kothari: So, some of the main challenges such as Russia Ukraine war situation, inflation and interest rates will continue, but investors anticipate slowing rate hikes, a decline in inflation and supply side constraint. Positively, among emerging markets, India is expected to grow faster than China, which may help the country attract more foreign investments. On the positioning front, most managers remain underweight in the technology sector due to rich valuation and recessionary risk in the key markets such as the U.S. and. Europe. Meanwhile, they maintain a positive view on high-quality large private banks and consumer companies as consumption picked up after reopening. They are also excited about specialty chemical companies being beneficiaries of China Plus One strategy, industrial and capital goods on renewed capital expenditure story because of the supportive government policies, reforms and political stability.
Lin: Like 2021, one of the buzzwords in the Indian equity market was the hot IPO market. These private companies start with a high valuation and then trade higher. What do you think about this trend?
Kothari: Yes, you are right. So, over the past two years, more than 200 firms have gone public, and some get listed at extremely high valuations. However, the trend has reversed as highly popular and overvalued IPOs such as Paytm, Zomato, PB Fintech, et cetera have corrected by 60% to 70% from their peaks. Profit booking, company-specific governance challenges, the unloading of stakes by pre-IPO investors as the lock-in period expired and investors' realization of their hyper valuations and lower future profitability all contributed to the fall.
Lin: Let's dig deeper into individual funds. Can you tell us some of the medalist funds and why are they highly rated within the category?
Kothari: Sure. The FSSA India is one of our high-conviction strategies. It is led by an impressive lead manager, Vinay Agarwal and supported by a strong 22-member investment team. Vinay has been managing this strategy for more than 10 years and brings two decades of investment experience. We believe FSSA's investing culture is among the best in the industry, the investment approach is distinctive, and its execution has been consistent across the market cycles. They focus on absolute return and capital preservation and buy high-quality companies for the long term. They're super-focused on the quality of a company's founders and management team, which is at the heart of their process. Their consistency can be illustrated by the fact that they were not tempted by the IPO frenzy and chose not to invest in these names because they were either too expensive or lacked quality merit. In contrast, several quality managers we observed anticipated in IPOs and lost money, which indicates a divergence in their quality approach.
And the second one, Stewart Investors Indian is a unique offering. With the sustainability-focused approach, we believe the lead manager Sashi Reddy is among the most capable managers in the offshore Indian equity category. Sashi has 18 years of industry experience and has been running this strategy for more than 11 years. He is backed by a talented and stable 12-person investment team. Also, the investment culture is best-in-class, and they remain committed and passionate about sustainable investing. Their investment process is unique, focuses on quality and sustainability and has a strong valuation discipline. They invest in high-quality companies whose products and services contribute to society's sustainable future. They have more than 30 years of experience in sustainable investing and prefer companies run by solid management teams with integrity and sound capital allocation skills. They are disciplined, long-term focused investors and have similarly avoided investing in overly-priced tech IPOs that did not meet their investment merit.
Lin: Thank you so much, Rama. And thank you for watching.
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