India funds have been the best performing in the third quarter of the year.
According to figures from Morningstar and AJ Bell, Liontrust India, Jupiter India, and Schroder India Equity are leading the top funds of this quarter’s ranking.
Japan, commodity, and smaller companies funds also feature among the best performing themes in Q3.
As a whole, the India/Indian subcontinent sector was the best performing sector in Q3, with a 14.4% quarterly return.
At the other end of the spectrum, China, Latin America, emerging markets and UK gilt sectors experienced a poor run in Q3.
A strong year for India
This quarter builds on what has been a very good year for India funds.
“The Indian stock market has been on a summer charge, and that’s reflected in the best performing funds of the quarter, and indeed the year,” says AJ Bell head of investment analysis Laith Khalaf.
Liontrust manager of the Liontrust India Fund Ewan Thompson explained to Money Maketing that this rapid recovery can be explained by India’s experience of the pandemic.
India came through the first Covid wave in 2020 relatively unscathed and was able to re-open its economy quickly. The second wave, albeit more deadly, was short-lived and the degree of lockdown less severe. In addition, the vaccine roll-out in India has been swift.
Thompson gave additional reasons for India’s recent strong performances.
He said: “A further reason for India’s strong performance lies within a broader cyclical economic recovery that pre-dated the pandemic, and one further boosted by a notably business-friendly budget announcement in February.
“One element of this has been a concertedly tight fiscal policy, an austerity regime of sorts, with the finance ministry resolutely focussed on protecting the budget deficit against calls for loosening the purse strings.
“In February this year, the finance ministry finally announced a major spending plan, looking to both support and facilitate the economic reset underway in the aftermath of Covid.”
Jupiter Asset Management manager of the Jupiter India fund Avinash Vazirani also explained to Money Marketing that India is benefiting from the “China plus one” model.
He said: “One regulatory change that has been overlooked during the pandemic is India’s introduction of Production-Linked Incentives, which now covers diverse sectors such as electronics manufacturing, food processing, and pharmaceuticals.
“We’re hearing that companies that usually source from China are looking to move to a ‘China plus one’ model, in order to diversify their supply, and India is an attractive alternative sourcing destination.
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This trend is likely to continue
Thompson believes that this underlying investment upcycle is likely to continue to drive the Indian economy for the years to come.
He said: “It is part of a long-term economic cycle that saw strong investment 2003-2009 followed by a long fallow period of repair and digestion of this investment, along with recovery from the effects of the Global Financial Crisis.
“Given the extremely powerful demographic forces in India, we see the ongoing investment cycle as therefore structural and not cyclical.
“At a time when China’s labour force has begun to shrink, India offers the opposite: a young and growing pool of labour, low-cost of production and a government keen to allow private businesses to take the lead in growing the economy.
“We would therefore look at the long-term investment cycle in India mirroring that of China through the 1990s to the present day – potentially being measured in decades rather than years.”
Vazirani also mentioned the rapid digitalisation of the country that predates Covid-19, as another growth driver for India.
He also found recent government’s reforms encouraging.
He said: “Over the last few years, we’ve seen the government introduce a unified goods & services tax, a new bankruptcy code, and a substantially lower corporation tax.
“We think there are several other pioneering reforms in the pipeline including reform of India’s complex land and labour laws.
“India’s ranking in the World Bank’s ease of doing business report has drastically improved in recent years, from 142nd in 2014 to 63rd in 2020.”
Potential obstacles
Although India seems to be in a good position, Thompson said that it remains “plugged into the global liquidity cycle”.
“A major global growth slowdown and attendant liquidity crunch would inevitably impact India,” he said.
He added that another risk could be an electoral swing back towards a more socialist-leaning government.
Vazirani also considered geopolitics to be a key risk for India. This is because the country has been subject of borders disputes for several years.
He said: “As recently as June 2020 there were deadly skirmishes with Chinese troops over this border, and as part of this dispute, India banned over 200 Chinese apps from being used in the country.
“While the situation has since cooled, with troops disengaging from several locations and diplomatic meetings taking place, we think that re-escalation of the situation is a potential risk and we are monitoring this very carefully.”
Vazirani also stressed that India is particularly sensitive to oil price.
He said: “India is a net importer of crude oil, and while there are plans underway to reduce this dependence, in the meantime India still imports 84% of its oil requirement which costs around $100bn.
“We do think that India has the potential to drastically reduce its dependence on oil in the near future, but in the short term the country is vulnerable to any significant and sustained increase in the oil price.”
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