David Kimberley
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Updated 06 Jan 2023
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Ashoka India Equity. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Like most of the world, Asian equity markets did not have the easiest year in 2022. China’s ongoing lockdowns, as well as deratings in many of its more growth-driven tech stocks, led to poor returns for many investors in a country that tends to dominate Asian portfolios.

Other regions, like South Korea and Taiwan, saw similar drawdowns in the more growth oriented parts of their respective stock markets. They may have also suffered due to recessionary fears, which are likely to lead to lower exports across the continent.

The result is that, on a price to book basis, Asian country indices are nearly all trading below their ten-year historical average. India has been the stand out exception to this, with the Nifty 50 – an index of the 50 largest publicly-traded companies in the country – up 4.3% last year on a total return basis in Indian Rupee terms.

A few factors seem to have been driving more positive investor sentiment for India. One is that the country looks likely to have delivered GDP growth of 6.8% in 2022 and is on track to see a 6.1% increase in 2023, according to estimates from the International Monetary Fund, although it should be kept in mind that this is partly due to a lower base rate caused by the pandemic.

Another is that the country has not seen the same sort of elevated levels of inflation that many countries in the West have. This is probably due to the government and central bank taking a much more conservative fiscal approach during the pandemic. India is also not suffering from the sorts of labour shortages which are now prevalent in many Western countries.

Looking beyond these more short-term phenomena, reforms made by the Modi government over the past few years are also bearing fruit and making India a more attractive investment proposition. The country has risen in the global ease of doing business rankings from the 142nd spot in 2014 to 63rd in 2020, largely due to over 30,000 pieces of regulation being either scrapped or simplified.

At the same time, the past 15 years have seen the proportion of middle-class Indians more than double, from 14% to 31%. It’s worth noting that the population of India also increased by approximately 300m over that period, so in numerical terms the number of people in India’s middle class almost tripled in that time. That’s led to a more dynamic economy, with increasing spending on various sectors, including consumer goods and healthcare.

Assuming these positive trends do remain in play, it’s plausible they’ll continue to support India’s equity market. However, a rosy macroeconomic picture doesn’t necessarily translate into returns for investors. That’s the reason the managers at Ashoka India Equity (AIE) ignore these sorts of factors and instead take a bottom-up approach to the companies they invest in.

The managers make particular use of an internally developed valuation system, which they have called ‘OpcoFinco’, that seeks to identify companies which have the best recurring cash flows. They believe valuing companies using this proprietary system better captures the levels of capital needed to sustain returns, as opposed to other metrics which can lead investors to fall into value traps.

At least thus far, taking this approach has paid off. Since its initial public offering in July 2018, AIE has been the top performer among trusts in the Association of Investment Companies that invest in India. From inception until the end of November 2022, the trust delivered annualised total returns of 17.7% on a net asset value basis.

But valuation metrics alone don’t generate the returns that AIE has produced. The managers also pay close attention to corporate governance, with a particular problem – as in many countries - likely to be ties between companies and the government.

AIE also has the largest on the ground research team in India among the specialist investment trusts that are focused on the country. Those analysts are also highly specialised. For instance, a team of four focuses solely on the Indian healthcare sector.

Having these specialists would be beneficial in any market but it’s almost a necessity in India, with the country’s stock market much more evenly weighted, on a sectoral basis, compared to many of its peers in both emerging and developed markets. Aside from financials, which is just over 20%, no sector constitutes more than 15% of the combined market cap of all the publicly traded companies in India.

Combined with the fact that there are over 4,000 publicly traded companies in India, this sectoral diversity can prove challenging. However, with a well-equipped analyst team, AIE is able to take advantage of the opportunities on hand. Moreover, many of these companies receive little to no research coverage from institutional investors, meaning the gap between a company’s share price and ‘true’ value can be wide, creating more opportunities for generating alpha.

What all of this means is that AIE is that, while there can be no guarantees and investors should be aware of the elevated volatility which single country funds in emerging markets can bring to a portfolio, the trust is well positioned to take advantage of the positive economic developments taking place in India. It’s easy to look at these trends and think that returns will follow. The reality is that it typically takes a lot of expertise to sort the wheat from the chaff. So far, AIE’s managers have proven themselves capable of doing so.

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