A relentless focus on stockpicking

There have already been 40 elections around the world in 2024, with many more to come. Perhaps one of the biggest surprise results we’ve seen was in India, where Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) party lost its majority.

The BJP has been ruling with a majority government for the past decade and the predictions were that it would, once more, win comfortably. It fell 32 seats short of the number it needed to win a majority.

Modi will continue his ten-year stint as Indian premier, but the BJP will have to form a government with coalition partners. America’s Washington Post newspaper claimed that the result was an “unexpected repudiation” of Modi, while most others agreed that it stripped Modi of his “aura of invincibility”.

Stock markets initially took the news badly. The BSE Sensex fell about 6% on the day of the result. The assumption here is that because Modi will have to work with other parties it will be harder to get bills passed.

However, the reality is that very little will change. Modi will continue his economic reform and pro-growth agenda, which has already helped increase India’s prominence in the global economy.

India’s share of global gross domestic product (GDP) has risen from 1.4% in 2000 to 3.7% in 2024 and is predicted to grow to 5% by 2030. Its contribution to global GDP growth, meanwhile, has risen from less than 3% in 2000 to 5.4% today, expected to rise to 7.7% by 2028.

The ease of doing business in India has already improved substantially, too, and exports are surging as countries shift manufacturing to India from China.

In addition, government investment in infrastructure is driving a rapid increase in capex. The number of airports has doubled since 2015, up to 148 today; the number of rural homes with a tap water connection has risen in that time from 20 million to 144 million and the scale of electrified railways the country has is up almost threefold from 22,000 kilometres to 62,000 kilometres.

No country is immune to the unpredictable factors determining whether the US and global economies enter recession this year. However, India seems to have some of the strongest secular drivers of growth, which could offset this.

Tax collections are rising, which is boosting the government’s coffers. Central tax to GDP is expected to be 11.7% in 2025, up from 10% in 2020, while the average monthly goods and services tax collection has risen by 12% a year since 2018 (from Rs890 billion in 2018 to an expected Rs1.9 trillion in 2025).

It’s worth pointing out here that a coalition government is nothing to be feared. They may be relatively rare to us in the UK, and America, but elsewhere in the world – even in Western Europe (think: France, Germany and Italy) they are closer to the norm.

Indeed, India was governed by coalition governments from 1989 until Modi was first elected in 2014. Only two of the seven elections that gave way to those coalition governments saw negative returns for the Sensex in the next 12 months.

Crucially, the BJP won more seats this year than any of the other partners in previous coalition governments had won, so that’s a solid grounding for their mandate.

In any case, the surprise result will change little for investors in India.

GDP and corporate profits are showing healthy growth, one of the reasons India might be reckoned to be one of the standout growth opportunities in world equity markets. The Sensex is pushing all-time highs once more and, while the valuation of the market is slightly above the 25-year average, it’s in line with the average for the period since Modi’s reform programme began.

As the managers of Ashoka India Equity (AIE) point out, macroeconomic machinations are risks to be mitigated as opposed to sources of alpha to be extracted.

The team’s (rather sensible) view is that the well-known macro unknowns hardly influence future returns from equity markets, if at all, and the unknown unknowns cannot be forecasted and the market implications of these events are unpredictable even if one had the crystal ball to foresee them.

Instead, AIE remains steadfastly focused on stockpicking, rather than timing the market or running a factor-skewed portfolio.

Its well-resourced team of 29 analysts are each assigned to specific sectors and asked to generate alpha within those sectors and are incentivised to do this by having their compensation linked to their contribution to portfolio returns.

The investment advisor White Oak, meanwhile, only receives a management fee it if outperforms the index over three years.

This all incentivises the continual generation of alpha rather than resting on past successes and are all factors that have driven AIE to be the standout performer in the AIC India sector.

AIE’s net asset value (NAV) total return over five years of 172% is well ahead of its closest competitor at 114.5%, its benchmark MSCI India’s 98.3% and the weighted sector average of 94% (all statistics to 29 July 2024).

A balanced portfolio and no single style skew should help AIE generate alpha through each stage of the cycle and capture the full extent of India’s continued emergence as an economic powerhouse.

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