Asset managers' optimism on India gets boost from budget, rate cut

Money managers' bullishness on India got a boost from the strong focus on developing infrastructure and other factors announced in the government's proposed budget, and a second rate cut last week have reaffirmed their overweight positions on the country.

The case for India as an investment destination has been growing, with an uptick in investment opportunities because of forecast GDP growth, beginning early last year. Then came a landslide victory for the Bharatiya Janata Party in the lower house of parliament in May, and a new prime minister, Narendra Modi, who had been chief minister for the state of Gujarat. Mr. Modi's reputation for creating jobs, pushing through projects and general success at the state level reinforced positive views for his role at national level.

The much-anticipated first budget announcement under the new government on Feb. 28 cemented money managers' overweight positions on the market.

“The previous government was not particularly business friendly — this one is,” said Richard Farrell, London-based associate portfolio manager at RBC Global Asset Management Inc. “We are very positive on the long-term outlook for India, and we reflect that in the weightings in our funds.” RBC GAM runs about $2 billion in global emerging markets equities strategies, with about $280 million focused on India.

Plus, India has potentially been the biggest beneficiary of the oil-price collapse over the past eight months, said Wim-Hein Pals, executive vice president, head of emerging market equities at Robeco Group NV in Rotterdam, Netherlands. “India pays $60 billion less (per year) on its energy bill now, (money) which is going into other productive areas.” Robeco is overweight India in all of its fundamental emerging markets equities strategies, and runs $20 billion across global emerging markets strategies. A breakout for India was not available.

India also moved up six places in BlackRock Inc.'s sovereign risk index update for 2014, published in January, to 36 out of 50. “India was the star performer of emerging markets in 2014 ... (with) the largest ranking gain,” the report said. BlackRock cited Mr. Modi and the Reserve Bank of India's governor, Raghuram Rajan, who have “sparked a wave of optimism on the Indian economy,” as well as an upswing in growth and a stabilized currency, as reasons for that bullishness.

Some managers are particularly bullish compared with the MSCI Emerging Markets index, which has a 7.8% exposure to India.

“We have about 30% of our global emerging markets fund invested in India,” said Rasmus Nemmoe, London-based lead portfolio manager of LGM Investments Ltd.'s Global Emerging Markets Growth and Income Fund. LGM is a subsidiary of BMO Financial Corp. “It is currently one of the few markets with solid potential for GDP growth, and is benefiting from lower inflation.”

LGM has $3.9 billion in assets under management, with $357 million focused on India.

Among the 2015-'16 budget highlights was an $11 billion boost to infrastructure spending.

In a note on its website, published March 4, Henry H. McVey, head, global macro and asset allocation at KKR, New York, and Sanjay Nayar, Mumbai-based CEO, KKR India, wrote that India's proposed investments will “attract foreign money. ... If India is backing itself, foreign investors will take note.”

And some already have done so.

“As Asia's third-largest economy, India is a key long-term growth market for (us), aligned with our strategy of seeking investments in markets that we believe will deliver attractive long-term risk-adjusted investment returns,” said Mark Machin, senior managing director, head of international, and president of Asia at the C$238.8 billion (US$190.5 billion) Canada Pension Plan Investment Board, Toronto. “India's development needs and CPPIB's investment strategy and mandate provide a good match.”

CPPIB has invested about C$1.4 billion in India since 2010, with the most recent deal in June, when it signed an agreement to invest 20 billion rupee (US$321 million) in the country's infrastructure sector, via L&T Infrastructure Development Projects Ltd.

And in January, Singapore's sovereign wealth fund GIC Private Ltd. said it had backed a Mumbai-based provider of financing for property developers, launched by KKR. The Sovereign Wealth Fund Institute estimates GIC's portfolio at $320 billion.

Siddhartha Singh, CEO, India, at PineBridge Investments in Mumbai, said investors have responded to India's potential by “increasing their weighting to Indian companies.” He cited data from the Securities and Exchange Board of India showing that foreign investors have injected around $4 billion for the year to March 3.

Indian debt, he said, has been as popular as equities.

Mr. Nemmoe said Indian fixed income recorded $26 billion of inflows in 2014, and $16 billion of inflows into equities. He expects equities investment to outpace debt for 2015, given the forecast uptick in GDP growth, lower inflation and a stable currency.

He added that an important signal for the future of the Indian economy and investment is the fact that domestic investors are returning to the market, through mutual funds. “They have been net sellers for the past four out of five years,” Mr. Nemmoe said.

But the positive economic vibe might not be translating into institutional inflows quite yet. Data from eVestment LLC in New York showed institutional investor outflows for Indian equities; but these have slowed to $182.4 million for the three months ended Dec. 31. That compares with $485.4 million of outflows for the same period in 2013. Institutional assets under management in Indian equities as of Dec. 31 totaled $9.9 billion.

The International Monetary Fund forecasts 2015 GDP growth of 6.3% for India, up from 2014's 5.8% growth. Annual inflation was 5.9% for 2014, down from 9.1% in 2013, and 11.2% in 2012.

The S&P BSE Sensex index has returned 7.2% year-to-date through March 2, and gained 32% in 2014, in rupee terms. That compares with the MSCI Emerging Markets index, which has returned 3.5% year-to-date through March 2, and -1.9% in 2014, in rupee terms.

“India still has one of the most attractive bond markets in the region,” said Prashant Singh, Singapore-based lead portfolio manager for Asia in Neuberger Berman Group LLC's emerging markets debt team. “Ten-year government bonds are yielding around 7.75%.” The team runs more than $4 billion of assets in emerging markets debt.

However, there are also some serious risks to the Indian economy.

The new ruling political party and the arrival of Mr. Modi as prime minister was a turning point for money managers.

“When we saw Mr. Modi and the party coming to power, we went overweight India,” said Kunjal Gala, London-based senior analyst within Hermes Fund Managers Ltd.'s emerging markets business, which manages $3.3 billion in assets (though a breakout for India was not available). “What was required was someone strong at the center (of the political party), with the potential to initiate and carry through reform.”

Some money managers, therefore, see key-man risk as the biggest problem for India's future, with investors looking to Mr. Modi to replicate nationally some of the success he had in Gujarat.

“If something happened to (Mr.) Modi, that would be extremely negative,” LGM's Mr. Nemmoe said. “A lot of this new approach by the (ruling party) rests upon (him,) and clearly the key-person risk is high.”

Neuberger Berman's Mr. Singh agreed: “A lot of the projects are being driven by the prime minister himself — that is not ideally the best thing to have in a broader government structure. But I guess that is something the market is willing to take as a risk for now.”

And there are also external risks. “While India's economy is more domestically focused than many others, it is not immune from global shocks,” said Prashant Khemka, Singapore-based chief investment officer of emerging markets equity at Goldman Sachs Asset Management. “A spike in oil prices to previous highs, which acts to worsen India's current account position, or heightened political tensions in other emerging markets, could result in increased volatility in Indian equities.”

GSAM's India Equity Portfolio has $1.1 billion in AUM.