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India has seen a challenging 12 months with an ambitious demonitisation plan and the reform of the goods and services tax
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This has created short-term disruption but seeks to address key structural problems in the economy
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Investors need to be selective in picking those Indian companies benefiting from the country’s long term growth.
- Economic reform seldom comes without some pain and India is no exception. The past 12 months have seen an ambitious demonitisation plan, which removed high denomination bank notes from circulation, and the reform of the country’s complex goods and services tax. Both reforms aim to address key structural problems in the Indian economy, but their success – or otherwise – may not be clear for some time and they create difficulties in the interim.The demonitisation plan, for example, sought to address the country’s vast black economy, bringing more of the population into the tax net and increasing tax receipts. There was an immediate impact on consumer spending, as money was withdrawn from the system. The long-term effects are also unclear – critics claim it has done little to wipe out the ‘black money’ thought to be held by corrupt businessmen and officials. On the other hand, tax receipts have risen. Either way, it will take time for its full effects to be realised.
The reform of the goods and services tax was designed to create a harmonised tax regime across India. Prime minister Narendra Modi wanted to see a truly single market among its 1.3bn consumers. However, here too, there were early difficulties. It raised taxes in some states, while lowering them in others. While it should ensure that there aren’t advantages to doing business in one part of the country over another, with all the resulting efficiencies, the advantages will take time to emerge.
Modi’s approval ratings remain high (http://www.indiatimes.com/news/india/modi-s-government-has-the-highest-support-anywhere-in-the-world-with-73-approval-ratings-325831.html) suggesting that any early teething problems have not dented his mandate to carry out reforms. Certainly, not all have been a resounding success, and many are still work in progress, but he has shown a determination that has eluded many of his predecessors.
After some years of uninterrupted growth, the reforms caused a contraction in the Indian economy in the fourth quarter of last year, but it has subsequently recovered and many economists are now predicting stronger momentum. (http://www.imf.org/en/Publications/WEO/Issues/2017/07/07/world-economic-outlook-update-july-2017 – p3 and p7). The economy is expected to expand by more than 7% both this year and next. We believe that the long-term growth outlook for India has been improved, rather than weakened, by the recent reforms.
Stock markets continue to believe that growth can be sustained. The CNX Nifty Index of India’s largest companies is up 15.4% over the past 12 months. The reforms have impacted certain sectors in the short-term – the consumer sector, for example, has been dented by the changes – but there is still plenty of opportunity amid Indian markets.
However, blanket exposure to Indian equities may not provide exposure to that growth. Earnings in general have been mixed, with some key industries struggling to produce growth. These have often been those companies with high state participation, while truly private companies have performed better.
This has been particularly notable in the financials sector, where our trust has a relatively high weighting. Financials make up around a quarter of the Indian stock market, but there is good and bad in the sector. The state banks have significantly underperformed. They are holding considerable non-performing loans on their books, and often don’t have the balance sheet strength to help create growth. This has allowed the private sector banks – where we are invested – to steal a march.
There is also significant variability of corporate governance in the Indian market: There are some excellent, well run companies, but investors need to decide who to trust and who not to trust. They also need to be comfortable that a company’s business plans are sensible. This is a market that rewards selectivity.
The Aberdeen New India trust focuses on three segments – finance, investment technology and consumer products. India is a strong economic growth story, but not every company in the index provides access to that growth. These are the areas where we find good quality companies in parts of the economy that are thriving.
Consumer spending, for example, remains one of the most exciting long term growth stories in India. The emerging middle class continues to grow and India is poised to become the third largest consumer economy by 2025 (https://www.bcg.com/d/press/21march2017-new-indian-changing-consumer-149010). We do not see the current reforms affecting that growth trajectory, in spite of short-term blips, and consumer-focused companies remain an important part of our portfolio.
Modi is making progress and has delivered on many of his promises. The result is likely to be a stronger economy in the longer term, but policies take time to work. At the moment, he has political good will and the population continue to recognise that reform is necessary. This should be a good backdrop for investors, but we still believe that the best way to approach these markets is through a concentrated portfolio of carefully managed, locally researched equities.
The Aberdeen New India Investment Trust PLC aims to provide investors with exposure to the most exciting areas of growth in the Indian economy, while carefully managing the associated risks.
RISK WARNING
Risk factors you should consider prior to investing:
- The value of investments and the income from them can fall and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Other important information:
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1YG. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.
Find out more at www.aberdeen-newindia.co.uk
