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magazineWhy India could deliver better returns after big tax changes
Within the global investment universe, the Indian growth story is among the most exciting. An Asian powerhouse home to over 1.3bn people, a population size second only to China, India boasts highly favourable demographics with an average age of 29, implying an enormous potential market for growth for years to come.
Recent tax changes could help renew investors’ faith in India and in this article we will look at some of the ways you can play the country via investment funds.
STATE OF PLAY
Economic growth has slowed and the stock market de-rated over the past year, with a major contributor to economic and stock market weakness being a liquidity crisis.
The non-banking financial system was impacted by last year’s default of lender IL&FS, a large infrastructure-focused non-banking financial company.
Liquidity has proved hard to access and companies that have failed to meet expectations have been hammered by the market.
Also weighing on sentiment is a reawakening of fears over prime minister Narendra Modi’s authoritarianism and embrace of Hindu nationalism, not to mention tensions with neighbouring Pakistan.
The Indian government led by Modi has taken decisive action to rejuvenate the economy via a giant cut to corporation tax from 30% to 22%, meaning the effective rate will fall from around 35% to around 25%, equivalent to a $20bn injection into the economy.
Taxes on new manufacturing investment were slashed to 17%, making India more competitive versus tax rates in Vietnam, Indonesia and Bangladesh at a time when rising US-China trade tensions are reconfiguring global supply chains.
David Cornell, fund adviser to the India Capital Growth Fund (IGC), says the tax changes underscore Modi’s belief the corporate sector will create jobs and increase spending, both key to a revival in confidence.
‘We believe these measures will lead to an across the board 9% boost to the (profit) of corporate India. But…more needs to be done to resolve bad debt issues and especially confidence in the financial and power industries.’
Besides this welcome economic stimulus, India bulls point out equity valuations have fallen to attractive levels, especially in the mid and small cap sectors largely ignored by large institutional investors. Indian stocks have begun to rebound since August.
INVESTMENT OPTIONS
Investors can access India via dedicated open-ended funds including Jupiter India (B4TZHH9), Matthews Asia-India (B3SWSK4) and Liontrust India (B1L6DV5).
Regionally-focused collectives with material allocations to the country include Stewart Investors Asia Pacific Sustainability B (B0TY6V5), First State Asia Focus (BWNGXJ8) and Bailie Gifford Pacific (0606323).
Investors also have the option of looking at several low-cost ETFs including Xtrackers MSCI India Swap ETF 1C USD (XCS5) and iShares MSCI India ETF USD Acc GBP (IIND).
Investment trusts with significant India exposure include Scottish Oriental Smaller Companies (SST), Fidelity Asian Values (FAS) and Templeton Emerging Markets (TEM).
Another option is Fundsmith Emerging Equities (FEET). Its biggest geographic allocation is India at 41.3% compared with a 10.7% allocation to Hong Kong, 6.1% to Egypt and 4.6% to China.
There is also a quartet of closed-ended country specialists, including Aberdeen New India (ANII) on a 13.5% discount to asset value (NAV) discount, its larger counterpart JPMorgan Indian Investment Trust (JII) on a 9% discount, and Ashoka India Equity (AIE), the outlier on a 2.3% premium to NAV.
The other India specialist is India Capital Growth, which is on a steep 17.2% discount to NAV. It focuses on the small and mid caps that have been hit disproportionately by the sell-off, although this highly concentrated, low turnover portfolio can and does invest in large caps where the managers believe long-term capital appreciation will be achieved.
Ocean Dial duo David Cornell and Gaurav Narain manage the trust. The former points out that the portfolio traded on roughly 12 times estimated earnings for the year to March 2021 at the end of August. When it last dropped to that level back in August 2013, India Capital Growth went on to deliver a 197% return (in sterling) over the ensuing three years.
BOUNCING BACK
Results for the six months to 30 June 2019 were disappointing, NAV falling 4.6% and underperforming the BSE Midcap TR Index by 2.1%. As of the end of August, there were just 34 holdings with the top 20 speaking for 69.2% of the portfolio, so this is a book of concentrated best ideas.
‘The country is taking a lot of painful medicine,’ concludes Cornell, ‘and it is having a very uncomfortable impact on the market and on the economy. It is a cleansing process which the government is fully supportive of. So companies are going bust, companies are defaulting on their credit and the housing finance sector has been worst hit and we’ve felt that in the portfolio.’
Yet he insists: ‘As India comes out of this process of self-flagellation, we think we’re going to go through a period of stronger, more sustainable economic growth with low inflation and that is a great environment for the kind of stocks in our portfolio to do well.’
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