After a relatively disappointing few quarters in the China market, investors are looking elsewhere for returns. While Japan has become a new favorite among institutional investors, India has also been in focus, as strong second-quarter returns brought the market to an all-time high. Despite a retreat of 3% since mid-July, Morningstar India Index has generated more than 8% returns year to date, compared to a 5% loss in the China market, as proxied by Morningstar China Index.
What’s Behind the Rally?
Morningstar’s senior manager research analyst Ramanand Kothari says: “Investor confidence took the market to an all-time high in June, especially within the small and mid-cap stock space.” India remains the fastest-growing economy in the region, and its capital markets are receiving strong inflows from both domestic and foreign investors. Other factors driving the strong performance include decent corporate earnings and easing inflation.
Kothari adds: “Together these factors kept investors optimistic about the long-term growth potential of India. It's worth noting that all offshore India-rated funds under Morningstar coverage have surpassed the MSCI Index year-to-date.”
In the very recent past, the Indian stock market has turned softer with expensive price multiples retreating to more normal levels, which Kothari thinks was expected.
“Some parts of the market, such as automobile, real estate, and capital goods, have done meaningfully well on the back of lower input costs as inflation cooled off, which could reverse if we see a rise in oil prices and a pick-up in inflation numbers,” he adds.
Valuations Are Down Slightly and Create Entry Points
A mild correction from an all-time high could potentially be an entry point for Indian equities. Joshua Crabb, head of Asia-Pacific equities at Robeco, is among the regional equity managers that likes India and thinks the market is “now closer to realistic valuations.”
He continues: “We highlighted that India was close to its highs [at the end of last year], despite that Asia was quite cheap. With the Adani revelations, we've seen that sort of coming back into a point where we think that's looking a little bit more interesting.”
At the same time, Crabb doesn’t think India an undervalued structural growth story either. “With those valuations coming back, we think that has really opened up the market for stock pickers like us to look for some opportunities,” he says.
What Are India Equity Managers Buying?
In terms of allocation, portfolio managers Kothari covers remain steadfast in the financial sector.
He says: “Managers are looking at high-quality private lenders such as HDFC Bank, which remained in the news due to its merger with non-bank financial institution HDFC Corp, ICICI Bank, and Kotak Mahindra Bank.” According to him, managers also have 'a decent exposure’ to consumer sectors due to the country's large consumer base and increasing purchasing power.
Kothari continues: “On the other hand, managers have maintained an underweight stance in information technology due to weak economic conditions in key markets, like the U.S. and Europe.”
Ahead, some bouts of volatility in the domestic market are on the horizon as an economic recession in the developed markets is still on the cards and the market will see fluctuations in the first half of 2024 in the lead-up to the next general election in the country, says Kothari.
Top Indian Equity Funds
For sale in Hong Kong, a total of 15 share classes from six unique fund products are top rated. Under Kothari's coverage, FSSA Indian Subcontinent Fund is a top choice.
The Gold-rated fund, which earns the top rating in both the Process and People pillar, is managed by Vinay Agarwal. The fund’s USD class returned 11.6% year to date.
“Agarwal stands out as one of the most capable managers within the offshore Indian equity space and has consistently impressed us with his exceptional knowledge of the management teams of Indian companies, a solid understanding of portfolio holdings and the investable universe, and a strong passion for investing,” Kothari comments.
“The team employs a bottom-up, quality-oriented, conviction-driven investment approach that has been time-tested and proven effective over various market cycles,” he adds.
In terms of stock selection, the FSSA team looks for high-quality companies with long-term growth prospects that are attractively valued and prefers strong business franchises that can deliver sustainable and predictable returns above their cost of capital with a healthy balance sheet.
Kothari explains: “The quality of a company’s founders or management teams is of utmost importance, and they must have a track record of integrity, fair treatment of minority shareholders, effective capital allocation, and long-term orientation.” At the end of July, the top three holdings of the 40-stock fund are HDFC Bank, Colgate-Palmolive (India), and ICICI Bank.
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