India has been one of the countries worst hit by the outbreak of covid-19, experiencing one of the highest infection rates in the world during the first wave of the virus in 2020.
But the response has been very positive, with the mortality rate falling and the lack of a second wave of coronavirus across the country.
This has undoubtedly helped in its recovery as it slowly goes back to pre-pandemic life.
“The epidemiologists are suggesting that probably India is getting much closer to herd immunity than many other countries, which is why the infection rate is falling so fast,” David Cornell, chief investment officer at Ocean Dial Asset Management, told International Adviser.
“And that’s quite encouraging; economically speaking India is 100% open for business now.”
Cornell believes that the country’s economic recovery has already started as “companies are showing some very encouraging top line growth, expansion in operating margins, and very strong profitability well above expectations”.
What does the market have to offer?
He said that the Indian small and mid-cap market has done “incredibly well” given the circumstances of the past 12 months.
“In rupee terms, it’s more or less back to where it was in November 2017. And in dollar terms, it’s about 10% below the highs of 2017.
“So, although the market’s done incredibly well, in the last nine months or so, actually, it’s only just recovering its level of three years ago. And if I look at the aggregate earnings of the market, in dollar terms, it’s around about 12% lower today than it was three years ago.
“Our view is that, although the markets been incredibly strong since April, it’s really only recovered the losses that it incurred from November 2017, all the way through to January 2020.
“And now that we’ve clawed that back, we can look forward with a fresh set of eyes to a future where we can see the market continuing to do well on the back of an earnings cycle that is just beginning.”
Changes
Ocean Dial’s India Capital Growth fund is largely invested in the country’s small and mid-cap market and, although promising, Cornell said they will make some adjustments to the sectors the fund is exposed to.
“We have a domestic bias already, but I think you’ll see us reducing our exposure to consumer; which is, historically, the relatively defensive area of the economy to invest in. It tends to be quite expensive and quite consistent in the delivery of growth.
“And I think we’ll look at some industrial cyclical exposure where we see a big increase in top line growth, which can translate into better earnings growth as the economy picks up.
“So, more financials exposure and more industrials exposure, more domestic cyclical exposure, and less of defensive consumer healthcare, IT and so on,” he added.
Prime minister Modi’s recent budget also cemented the country’s pro-growth stance going forward, which will undoubtedly attract investors.
“India was, fiscally, very disciplined in the pandemic year,” Cornell said. “The government did not open the floodgates and spend and raise its fiscal deficit in a way that developed markets have done.
“There hasn’t been a huge increase in government spending to support the economy during covid. In fact, it was the opposite. But now the country is economically going back to normal, and the government is starting to increase its spending.”
India, the afterthought?
But then, why are investors so light on India?
Cornell believes that “the market has largely been abandoned by foreign investors over the last 12-14 months”.
He attributes this to the earnings recession of the last four to five years, but he now expects to see consistent upgrades going forward, which create plenty of opportunities for foreign players.
The lack of interest or investment flowing into India can probably be attributed to China’s presence in Asia, Cornell added.
“All the focus has been on China, which obviously had a great year last year and will probably continue to do very well. We think investors are increasingly ignoring India, because of their obsession with China.
“And China is almost sucking capital away from the rest of Asia, because of the huge increase in its weight in the MSCI index.”
This is despite India being at around 8-8.5% of the MSCI Emerging Markets Index, he said.
“International investors are very often momentum driven, so if they see a market doing well, they’ll naturally get drawn to it.
“I think you’ll see that India will be much more in the focus, particularly because it’s going to be growing faster. We think Modi’s policies will be more about growth and less about restructuring, less about reform, more about growth.”
Small and mid-cap growth
He continued: “We think there’s an opportunity because India’s being ignored. And if we look at the International Monetary Fund’s forecasts for GDP growth for next year and the year after, India is expected to be the fastest growing economy contributing around about 16% to global GDP growth.
“From that perspective, we think investors are very underweight in this market.”
Cornell suggested that one of the best ways to gain exposure to the Indian market is through investment trusts; as they have a predominantly smaller mid-cap focus, which is largely dominated by domestic businesses.
“As the economic recovery picks up in India, it’ll be the domestic companies, the mid- and small cap companies, that get the benefit of that.
“They were the companies that suffered the most in the slowdown, so they’re likely to be the ones that benefit the most in the recovery.
“And obviously, the capital growth is very heavily skewed towards that area of the economy.”
The discount is still present, Cornell added, “you could still buy the shares at 85p to the pound, so there’s a level of protection that’s already built into the share price.”
