Modi gets India back on track
SAVERS with cash in high-risk funds investing in India should be raising a glass. The occasion? Celebration of the first year of Prime Minister Narendra Modi’s reign.
Since his sweeping election victory in May last year, investors have enjoyed stellar returns on their money.
The Matthews Asia India fund has returned a chunky 40pc over the past 12 months – turning £1,000 into £1,396 – while the majority of mainstream funds, including those from Jupiter, Blackrock and First State, jumped around 30pc, figures from analyst Trustnet show.
‘ Savers are looking at global emerging markets again, after a period where they have been out of favour, and India looks good,’ says Kunal Desai, manager of the Neptune India fund which grew by more than 26pc over the same period.
But earlier this year these funds were posting spectacular annual returns of up to 77pc, and a dip in the stock market in March has prompted some savers to wonder whether Modi’s success has started to tail off already.
Others think the recent lull could be a buying opportunity.
Like many emerging markets, India has long been in need of drastic economic reform. For years, a debilitating mix of stuttering economic performance, corruption, high inflation, poor infrastructure and a large gulf between the rich and poor has convinced high-risk investors to look elsewhere.
But Modi has proved a catalyst for change, and his country is being tipped as the new go-to developing market. It is expected to be the fast- est growing emerging economy by 2016. Under him the government has cut its deficit by $60bn, instigated a manufacturing drive in a bid to create some international Indian brands, and laid plans to improve social and working conditions.
Inflation has halved to 4pc and economic confidence has put a rocket under its stock market.
Such a strong run over recent months means some share prices are now looking overpriced, Desai warns. He is avoiding consumer firms which have been among the most popular, but adds: ‘Yes, some shares are more expensive compared to other emerging markets, but there is a good reason for that. It is the power of good, predictable returns from these Indian companies.’
Desai is looking to tap into the region’s structural reforms and economic recovery by backing high quality healthcare and media companies, and firms which will benefit from investment in infrastructure. He is a fan of IT services businesses Infosys and Tech Mahindra.
While Modi has certainly made waves since he came into office, some experts are concerned that a lot of his successes have been little more than luck. The crash in the price of oil has been a major contributor in helping to bring down inflation and reduce the hefty government deficit. If it rebounded it could undo some of this good.
And, of course, there are factors beyond his control.
A heatwave has claimed the lives of some 1,800 people in the country this week and threatens thousands more. Yet the Indian economy is expected to grow by 7.5pc this year, beating even economic powerhouse China, which is forecast to see growth of 6.8pc.
Darius McDermott, managing director at broker Chelsea Financial Services, says: ‘India has the potential to be the great emerging markets story of the next two decades. But investors should expect bumps in the road and it should still be regarded as a high-risk investment.’
For savers with a strong stomach he recommends the Jupiter India fund. Its biggest investments are in banks, IT firms and oil and gas producers. It has turned £1,000 into £1,651 over the past year. But, as is often the case in these volatile regions, its longer-term performance has suffered. In the three preceding years it lost money for investors.
To spread your risk, choosing a general emerging markets fund will invest across a number of countries.
McDermott l i kes the Lazard Emerging Markets fund, which has around 10pc of its money in India. It also invests in Brazil, South Korea and South Africa.
India has made some decent inroads into its turnaround but there’s a long way to go yet. The rest of the road is likely to be a lot slower going with some major ups and downs along the way.