One of the best options for long-term investors looking for higher risk/return opportunities is the Emerging Markets. The region offers huge potential upside as the various countries develop, although there are many challenges for them to overcome along the way.
A well-diversified regional fund offers the safest way for people to profit from this area, whereas a specialist single-country mandate provides a more focused investment that can capitalise on pockets of strength.
A good example is India. The election of Narendra Modi as Prime Minister in 2014 with his programme of business friendly reforms has the potential to completely transform the country’s prospects. The improved outlook enabled the MSCI India index to outperform the broader MSCI Emerging Markets index by 26% that year.
India experienced another year of strong relative performance in 2015, but then lagged behind the rest of the region in 2016 as the pace of the reforms turned out to be slower than expected. It now seems that the momentum has gathered pace again following the success of Modi’s BJP party in the Assembly elections in March.
There are three single-country investment trusts that provide exposure to India and all of them are trading on double-digit discounts of between 11% and 14%. The best performer over the last five years is the £113 million India Capital Growth fund (LON:IGC) with a NAV return of 157%. It is different to the other two as it has a greater focus on mid and small cap companies.
The election of Narendra Modi as Prime Minister in 2014 with his programme of business friendly reforms has the potential to completely transform the country’s prospects.
These sorts of businesses are better able to exploit the exceptional growth prospects offered by the Indian economy than the large caps that often rely to a large extent on exports. In order to guard against the extra risks of investing in smaller companies, the managers concentrate on those that can perform well even in a challenging economic environment.
By far and away the largest of the three funds with a market value of £790 million is JPMorgan Indian (LON:JII), which has achieved an increase in its NAV of 120% in the last five years. The fund has done especially well in the last couple of years as the manager has concentrated on stocks that are more sensitive to the performance of the Indian economy and these have benefited as Modi’s reforms have started to come through.
The other option is the £275 million Aberdeen New India (LON:ANII), which has built up an excellent track record by focusing on high quality companies. It has a concentrated portfolio of 41 stocks with the largest exposure being the Financials sector that should benefit from the long-term expansion of the wealth of the middle class.
One of the biggest challenges facing the country is the size of the black market economy and the associated tax evasion. In order to counter this Modi ordered the surprise withdrawal from circulation of all 500 and 1,000 Rupee notes to force the culprits to reveal their hidden wealth. This tells you everything you need to know about how determined the prime Minister is to turn things around and transform the country.