No going back

It was another year of outperformance for Ashoka India Equity (AIE) in 2023. The trust, which invests across Indian equities and is currently substantially overweight to small caps, delivered total NAV returns of 24.5% over the 12 month period, compared to equivalent returns of 18.4% in the benchmark.

The trust’s performance, as well as those strong benchmark returns, reflected a wave of enthusiasm for the country, which may continue into the new year. Partly that’s due to the country’s robust response to inflation and rate hikes. In the past, a stronger dollar has hit India because the country ran large fiscal and current account deficits. Neither of those things has been true recently. The country was quick to hike rates, has a huge stockpile of US dollars to defend the rupee, and is continuing to see inflows from foreign investors.

On a topline level, the country has consistently been the fastest growing major economy globally over the past five years. Goldman Sachs research estimates that real GDP growth was 6.4% last year and the investment bank has forecast an equivalent figure of 6.3% for 2024.

In equity markets, Morgan Stanley’s chief Asia and emerging market strategist noted last month that Indian companies have averaged cumulative earnings per share growth of around 60% in dollar terms over the last three years. That compares to a 20% decrease in average China earnings and flat growth in other emerging markets.

AIE’s portfolio has plenty of examples of performance akin to this. For example, Bajaj Finserv – currently a top 10 holding for the trust – delivered a nearly 90% increase in net income from 2020 to 2023.

As we head into a new year, the key factor that seems to be on the minds of India investors is the upcoming general election, which will take place in April and May. Although the incumbent Prime Minister Narendra Modi is expected to regain a third term in power, there are still jitters among the investment community that a low probable scenario of a loss would be bad for the country’s growth prospects and put a halt to the impressive stock market returns we’ve seen over the last decade. We are not in the business of forecasting elections, nor do we believe it’s something many analysts demonstrate great aptitude for.

What we do know is that many of the changes Modi’s government has overseen would be very difficult to undo. Nor would it be in interest of a new government to hinder them – given the aspirations and expectations of a young, intellectual and vibrant population.

Take logistics as one example, research from Gavekal shows that India’s highway network has more than doubled in size over the last decade. That looks set to continue in the near term, with the networks set to hit 200,000 km of road in 2025 – up from less than 80,000 in 2013.

Average freight train speeds, which long languished in the doldrums, have increased by over 60% in the last two years. Freight trains are also on track to have their own trainlines in the near future. Finally, the rollout of 5G in India over the last 18 months has been perhaps the most rapid, considering size, of any country yet. So successful has this been that India has moved up the Global Speedtest Index, which ranks countries by their mobile download speed, from 119 to 18 – ahead of the UK, France, and Germany.

We see the benefits of this rollout in the AIE portfolio as well. For example, the rollout of a new payments and national ID system under the Modi government has brought in excess of 600m people into the banking system, according to the International Monetary Fund.

Combined with growing disposable incomes, this partly explains why AIE is heavily weighted to the financials sector, which makes up close to 25% of the portfolio. Unlike the UK, where financials tend to be more of a value-driven income play, Indian banks are expanding services, often to first time consumers, in areas like business and auto lending, as well as credit cards. Bajaj Finserv’s recent results provide one example of this but so too do the returns driven by large conglomerates, like ICICI bank.

As readers can likely infer, rolling back these developments would be close to impossible. It is hard to imagine a new government rescinding digital IDs or digging up newly built transportation routes.

The other key fear we see is valuations. India has been the standout performer in emerging markets in the last 12 months and we have seen some Asia funds cut back exposure due to the high multiples at which Indian stocks trade.

We would note two points in response to this. One is that, as the Morgan Stanley analysis indicates, India has delivered impressive earnings growth in the last three years. As the performance of the US mega cap tech stocks over the last decade illustrates, investing at a higher valuation can make sense if a company actually delivers on earnings growth. Whether Indian companies can do so, at current valuations, will be the question all minds are focused on going forward.

For those looking at AIE against this backdrop, themanagers strong track record will be of interest. Although they are willing to invest at higher valuations, they will only do so if a company has the cash flow growth and corporate governance standards to justify doing so.

It is a process that has paid off, with the trust by some margin the best performing closed-ended fund among its peers since IPO in 2018. Compared to the benchmark, the trust has also delivered cumulative outperformance, on a NAV basis, of almost 60% from inception in mid-2018 through to 10/01/2024.

 There may be bumps in the road ahead for India but what is clear is that many of the changes which have been made for the better there are difficult to reverse. These changes will continue to deliver benefits for economic growth, and the team behind Ashoka has shown itself to be a shrewd operator in this exciting market.

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