23.10 Liontrust Views Autumn 2023 Literature (Single) - Flipbook - Page 13
Taking a deeper look
While there are clearly opportunities, there
are also risks that investors should be aware
of when considering India or any other
emerging market.
Over the past five years, returns from emerging
market equities have been lower than stock
markets in major economies such as the UK,
US and Europe. Some regard India’s equities
in aggregate as being expensive relative to
other emerging market economies. Data
from Refinitiv, published in June, suggested
the total value of Indian equities had reached
$31.5 trillion – greater than the value of
the UK and French stock markets, the two
biggest in Europe, combined.
Other challenges include the rising price
of oil – India is a big importer of oil, and
prices have risen recently amid supply cuts.
Climate change – and the environmental
risks this poses – is also an issue that
investors should consider when thinking
about India. The agricultural sector plays
a big role in the Indian economy yet the
stability of these markets is threatened by
climate change, and natural disasters
such as torrential rains and landslides are
becoming more common.
Despite Modi’s ostensibly friendly business
policies, there have also been recent
instances of protectionism which have
caused some concern. In August, the
government unexpectedly announced a ban
on the import of personal computers and
laptops, affecting household names such as
Apple, Samsung and Dell.
According to James Klempster, Deputy Head
of Multi-Asset Investment at Liontrust, it is
worth remembering that as an investor, you
are buying into a fund or stocks, rather than
buying high GDP or positive demographics
– however good they may be. “While the
macro environment surrounding a market
may make a compelling case, the investment
argument has to stack up.
“There are a number of different facets to
this – one is that if you overpay for assets
in emerging markets – as with anywhere
in the world – you are investing against a
headwind rather than with a tailwind.
“Also, in markets such as this, it pays to
invest with a proven expert. There are plenty
of pitfalls for the unwitting and so it is the
sort of market where one would want to
invest with an active manager with a tried
and tested process.”
Liontrust’s Anthony Chemla summarises the views of emerging market investment
managers with four reasons to be bullish and four reasons to be bearish about India.
Bull points
Bear points
Positive factors for the Indian equity market
Negative factors for the Indian equity market
• Emerging economies like India, with comparatively stronger
fundamentals, have experienced a shift from headwinds to
tailwinds. Inflation has sharply declined at the retail level and is
deflating at the wholesale level. Domestic interest rates are likely
to be at their peak. Commodity prices have cooled and stabilised
from their peaks, and the US dollar is expected to weaken further
relative to other currencies. Bond yields have also fallen amid a
stable monetary policy outlook.
• Global markets: Lacklustre growth in global stock markets can
weigh on India. This includes markets in Japan, China, Hong
Kong and the US.
• Domestic stocks are reaching new highs due to a stable macro
environment, a growing economy, and healthy corporate profits.
Strong domestic demand, favourable government policies, and
robust business and consumer balance sheets have made the
region an attractive and fast-growing major economy.
• Structural shifts and domestic megatrends: Given the limited
opportunities for growth on a global scale, inflows into emerging
economies, including India, were inevitable. Listed corporates in
India have reported healthy earnings, with the banking, financial
services and insurance sectors all contributing significantly. This
resilience has fuelled investor optimism, as macroeconomic
indicators reflect a growing economy and moderating inflation.
• Considering the advancing trend of economic growth and
expected rate cuts towards the end of 2024, small cap and micro
cap stocks are favourably positioned in the current bull cycle.
These stocks benefit from disproportionately higher exposure to
the industrial sector, discretionary spending and niche segments
that align with the ongoing period of strong economic growth.
• China factor: Weak factory activity data from China can heighten
concerns about its economic recovery and can also impact the
rest of Asia, driving worldwide equities lower, including in India.
• The impact of bank and financial services stocks with the
heavyweights like HDFC Bank can contribute to the decline of
the Indian markets (Sensex and Nifty). The fourth quarter of 2022
and the first quarter of 2023 were prime examples of this.
• MSCI rebalancing: changes to the composition of the stock
market index by MSCI can have an impact on investor flows into
and out of individual companies. Adani Transmission and Adani
Total Gas have both suffered from this.
LIONTRUST VIEWS – AUTUMN
13
