Indian funds ‘hiccup’ over economic confidence

Only two Indian equity funds actually made a return and none beat their emerging market peers over the year to 31 August 2019, according to FE Analytics.

Data from FE/Fundinfo found over the time period the best performing Indian equity fund was Ellerston India with a lacklustre return of 2.7%, compared to the emerging market funds sector average of 5.02%.

Fidelity India fund followed at 1.5%, then Jaipur India Growth at a loss of 2.9%, India Avenue Equity Retail at a loss of 8.1%, and Fiducian India at a loss of 8.6%.

Indian fund performance v sector average one year to 31 August 2019

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Source: FE Analytics

According to Bank of America Merrill Lynch’s latest global research report, Indian equities lost 0.2% of assets under management (AUM) over the week to 12 September, 2019, and US$2.6 billion ($3.8 billion) year to 12 September.

Fiducian’s head of investments, Conrad Burge, said there had been a lot of volatility over the past year especially within the small and mid-cap space.

“The volatility was due to a loss in confidence in the direction of the economy as it has slowed down along with global uncertainty that have affected the domestic market and some foreign funds selling out of India in recent months has not helped,” Burge said.

“At the end of June India’s GDP [gross domestic product] was at 5% – below expectations – but forecasts going ahead have estimated GDP to be over 7%.

Burge noted there had been disruption to India’s structural policy including the replacement of old bank notes, a new sales tax to shore up public finances, a tightening in credit conditions imposed by regulators, and the financial sector had got into trouble from poor lending and bad loans.

However, there were moves to counter this to help the stock market including the Reserve Bank of India cutting policy rates to its lowest over the last nine years at 5.4% and now had an easing policy bias.

“We think there’s going to be a turnaround given the easing and the central bank policy and at any rate we think these are short term hiccups,” he said

“The long-term outlook for India is very positive. With its high growth it is projected to be the fourth largest economy in the world by 2030.

“There’s enormous potential to make making money out of infrastructure spending due to the need for roads, ports, railways, border system, sewerage system, airports, and so on.”

Burge noted that the majority of the fund’s exposure would remain in mid and small cap sectors with some exposure to large caps.

He said small caps would recover because it was an innovative sector in the country with a lot of companies constantly entering the market.

“While it usually outperforms, it is more volatile than large caps. The middle class is growing and is investing more and more into the stock market so we’re seeing strong inflows into domestic funds,” Burge said.

“Year to date we’ve had $16bn flow into the stock market from domestic funds and this will accelerate over the coming years.”

Burge noted that out of all the emerging markets, India was his preferred choice as other areas such as Venezuela, Argentina, Brazil, South Africa were not doing well.

While the Fiducian fund underperformed over the short-term the fund was placed in the top quartile over five and 10 years with returns of 64.9% and 161.7% respectively. It also placed seventh overall in terms of emerging market focused funds over the five years to 31 August, 2019.

The Fidelity fund was the top performing Indian fund over the five and 10 years at 88.8% and 179.6% respectively.