Henderson: Why We Have High Conviction in Indian Equities

After a very good run in 2014, the Indian stock market has disappointed year to date. But this creates buying opportunties says Henderson's Andrew Gillan, as long as reforms take place

Emma Wall 24 November, 2015 | 11:21AM
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This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks for the chance of fantastic rewards from across the region.




Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Henderson's Andrew Gillan.

Hi there.

Andrew Gillan: Hi, good morning.

Wall: So, today we're focusing on India in our investing in Asia week and India is actually a market that you feel pretty positive on, isn't it? You're overweight within the funds.

Gillan: That's right. So, Henderson in our Asian growth portfolios we have about 20% allocation towards India. The reason that we like India is that it gives us good diversification in terms of Indian companies operating overseas and outside of the region but also a good exposure to the domestic consumption story within India.

So, our largest position is in HDFC which is the leading private sector mortgage company in India. It's got a really impressive track record of earnings growth and stability in net interest margins and spreads despite volatility in interest rates and even kind of the political environment within India. So, broadly speaking, we have good exposure to financial services, HDFC included; the consumer sector, but we're more measured because valuations are quite expensive in the consumer sector. We have a smaller position in Dabur.

And then we like pharmaceutical companies. We've got two positions in the pharmaceutical sector, Lupin and Aurobindo and we also like IT services. So, we've added recently Infosys to the portfolio and we have TATA Consultancy and Tech Mahindra as well. So, again, we think these sectors can deliver good earnings growth despite sort of the environment within the region from a macro perspective in Asia. India has maybe disappointed a little bit. There was this euphoria post Modi's election.

Wall: Expectation was very high.

Gillan: That's right. And recently we had the Bihar state election which was a disappointment for the government. So, there has been disappointment, but I think as investors we're quite realistic in terms of the pace of change within India. And the domestic economy is still doing relatively well compared with other parts of Asia.

Wall: Presumably that disappointment creates buying opportunities because actually as a fund manager, as a stock selector you probably want sentiment to be too high. If sentiment high that means probably prices are high and as you say, following that successful election the first non-coalition government in 30 years, everybody was very pro-India.

Gillan: Yeah. So, in 2014 India did very well and outperformed the region. So, in 2015, I mean, what we've seen is really the market take pause. India has done okay. Its currency has also held up relatively well because they've made good inroads in addressing the current account deficit which was a concern of investors a number of years ago.

But at the same time, there has been a pause for breath. Earnings growth has also disappointed a little bit. It's still been among the strongest in Asia, but it's been less strong than expected at the start of the year.

Wall: India has been sort of held as the Holy Grail in so far as the two big threats to emerging Asia region is the fact that China is slowing down and also the fact that the U.S. is beginning to look a little bit wobbly. But India is isolated in part from both of those. Do you think this means that it has the greatest chance of survival if those two things happen?

Gillan: Well, we're more positive broadly on the region anyway because I think the China slowdown and growth has been quite well-flagged and is part of the overall transition in the economy. So, I think the Western commentators are blaming China for the slowdown in global growth, but actually it's quantitative easing in the Eurozone and Japan that's having a negative impact on global growth in U.S. dollar terms.

Yes, China is slowing but it's still growing and it's still growing at a reasonable rate relative to developed economies. But to your point, India is certainly more resilient against a weaker global backdrop because the domestic consumption story is very strong. But in order to achieve that we are going to have to see more meaningful progress in politics, infrastructure investment, more FDI, for example, which has been a criticism of India in the last decade or so.

Wall: And India is not the only region that you're positive on within Asia, is it? Where else are you overweight?

Gillan: Selectively in ASEAN, so in some markets like Malaysia, we don't have any exposure in our portfolios at the moment just because the impact of the lower oil prices particularly impacted Malaysia. And it's also true that the lower commodity prices has impacted ASEAN generally and had a knock-on impact on consumption. So, in markets like Indonesia, which is a very buoyant consumption story, has something like 250 million consumers.

So, it grabs the headlines as a next potential large market in Asia and we've seen a real slowdown in consumption because of the lower commodity prices. So, selectively we've been looking at opportunities. We've maintained a position in Bank Rakyat which does a lot of the micro lending and micro financing and we still think is a good long-term story. We're looking at some of the consumer stocks like Astra and like Unilever but we don't currently own those positions in the growth portfolios.

On a brighter sort of note where we're overweight is the Philippines, but the Philippines is such a small market that one can be overweight by only having one position. So, one of our larger holdings is Ayala Corporation, for example, which is a diversified conglomerate financial services property and also telecoms and that's a good proxy for the environment in the Philippines.

Thailand is probably a bit more controversial and a bit more non-consensus because given the political backdrop there GDP growth has disappointed in Thailand. Infrastructure projects haven't come through. So, we are kind of maintaining our position there, particularly in the banking sector with Kasikornbank, for example, despite the weaker backdrop because from a company-specific backdrop, it's a good company, it's well-run but it lends to SMEs and SMEs are struggling at the moment. So, the provisioning has increased and nonperforming loans have disappointed a touch.

Wall: Andrew, thank you very much.

Gillan: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar

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