The re-election of Prime Minister Modi has provided a boost to the specialist India-focused investment trusts.
With the political uncertainty in the UK casting a shadow over the London market, it could be a good time for investors to look for a more supportive environment elsewhere. A prime example is India, where the incumbent Prime Minister, Narendra Modi, has just won a landslide election victory, securing another five-year term for the ruling BJP.
Modi was originally elected on a mandate of meaningful economic reform, and in his first term he managed to deliver a number of important changes, including demonetisation, the Goods & Services Tax, and the Insolvency & Bankruptcy Code.
Business-friendly policies set to continue
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Rukhshad Shroff and Raj Nair, the managers of the largest investment trust specialising in the country, the £930m JPMorgan Indian (LON:JII), believe that the continuity of Modi’s role as Prime Minister is helpful, with business-friendly policies set to continue.
They say that India’s economy remains at an early cycle stage and that nominal GDP growth over the last five years has not fed through to earnings growth, with corporate earnings being flat for some time.
The key reason for this is that the banking sector has been through a negative earnings cycle due to non-performing loans, but the provisions for bad debts are now at more realistic levels and capital positions are being rebuilt, which bodes well for the future.
India’s domestic economy has substantial potential due to its massive population of around 1.3 billion people, of which two-thirds are of working age. The demographics are far more positive than they are in the UK, with a median age of 28.1 years versus the 40.5 years in this country.
Recovery in domestic earnings
JPMorgan Indian focuses on high quality growth franchises and is positioned for a recovery in domestic earnings, while being underweight in sectors sensitive to the global economy (IT Services and Energy), as well as Consumer Staples, which are more defensive and typically trading on high multiples.
It is by far the largest and most liquid London-listed Indian equity investment trust, with total assets of £930m and competitive ongoing charges of 1.09%. The shares have returned 93% over the last five years, yet they are currently trading on a discount to NAV of 11.9%.
Another well-established fund operating in the sector, the £117m India Capital Growth (LON:IGC), has recently reduced its management fee from 1.5% to 1.25%, with the ongoing charges figure expected to drop to 1.6%. Its shares have returned 101% over five years and are trading on a 10.8% discount.
David Cornell, Managing Director and Chief Investment Officer of Ocean Dial, the investment manager of IGC, says that the re-election of Narendra Modi reignites the investment case for India.
“We anticipate that reform based policy initiatives can gather momentum as the focus switches to creating productive employment and ensuring India continues on a more business and investment friendly journey.”
The other two investment trusts to consider are the £330m Aberdeen New India (LON:ANII), whose shares have generated a five-year return of 106% and are trading on a 10% discount, and the £52m Ashoka India Equity (LON:AIE), which was launched last year.