The India success story
Sandeep Kothari, portfolio manager of the Fidelity India Fund, is a true believer in the India story.
“India is one of the world’s economic success stories of late. Its economy is growing strongly and it is a consistent performer. India’s economy is forecast to grow at about 7 per cent per annum for the next four years, and it has only experienced one year of negative growth in the past 25 years.”
However, he adds that the agricultural sector will remain a swing factor, as it is dependent on the annual monsoons, although the service and manufacturing parts of the economy are performing well.
Kothari believes that a combination of secular and more cyclical factors, such as a renewed investment cycle, have helped corporate earnings in India grow close to 30 per cent annually over the past three years.
As a result, this profit growth has helped sustain valuations, despite the considerable share price gains seen recently.
The strong earnings growth from commodity-related companies has also been a factor in more recent times, driving overall earnings growth.
He predicts that over the next two to three years corporate earnings growth will slow to between 10 per cent and 20 per cent per annum, partly due to the effects of coming off a higher base and because lower returns are expected from the commodity sector (which has meaningful representation in the indices and is impacted by downstream pricing control).
“However, stocks within the telecommunications, consumer and bank sectors are expected to record higher levels of earnings growth and are of interest. Given the divergence among sectors, stock selection is likely to become more important on the Indian market over the next few years,” Kothari says.
He also says, “investing in India should be viewed as a long-term strategy”.
“We believe there is strong growth potential in the market, which continues to evolve as new companies list.
“However, investors need to be prepared for short-term volatility. Companies looking for growth outside the domestic market may experience higher returns, but this in turn will bring higher risk.”
Mugunthan Siva, chief investment officer for OptiMix in India, is launching a series of Indian fund-to-funds for Indian investors from February to April, with a similar product for Australian investors likely to follow.
He agrees India is more expensive, trading at a 40 per cent premium to the MSCI Emerging Markets index as a whole, but adds: “the growth story over here is broad, with no one investment sector being over 20 per cent and over 5,000 stocks, in comparison to the likes of commodity-driven markets like Russia and Brazil. China has a similar growth profile to India, but that has not translated to strong investment returns as yet.
“The cultural barriers take a lot longer than the business barriers. China will always be a great manufacturer but needs more changes.”
Siva adds that, despite the inferences about corruption in India, corporate governance has improved and companies go to some pains to explain their risk management.
“They understand that globally these are issues that will be confronted in going forward,” he says.
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