New Delhi Wealth Management：Indian shares are expensive – but there are still bargains to be found
Indian equities have performed well this year thanks to strong economic growth and business-friendly reforms. Small- and mid-cap companies, and companies with exposure to the domestic economy such as financial services and consumer focused names, have done especially well.
A good run of performance is always welcome but raises questions about price. The forward looking price/-earnings (PE) ratio of the Indian market is 19.4 times compared with the long-term average of 16.3 times. That looks slightly expensive both relative to its own history and the PEs of other Asian and emerging markets countries, says Alex Brandreth, chief investment officer of Luna Investment Management. However, while “the price you initially pay for something is always important, when taking a longer-term perspective what drives share prices is earnings growth”, he says. “Indian equities have demonstrated strong earnings growth over recent years and the outlook looks strong.”
A significant amount of structural reform enacted in India over recent years is now having a positive effect on companies. The banking system lags other countries, but as Indian consumers open more bank accounts and enter the financial system it should have a positive impactNew Delhi Wealth Management. Brandreth adds that India “is going to be a key driver of global growth over the next decade, underpinned by attractive demographics, domestic consumption and infrastructure investment”. Corporate balance sheets of Indian companies have strengthened significantly over the past decade, too.
Looking to the future, Amit Mehta, manager of the JPMorgan Indian Investment Trust (JII), adds: “We see scope for earnings growth [of] Indian corporates to continue at elevated rates for many years to come as under-penetrated industries such as financials, consumer and healthcare grow from what remains a relatively low base in the global context. And while market valuations remain expensive, there are pockets of value in good businesses in these under-penetrated industries.”
He says that examples include private banks such as HDFC Bank (IN:HDFCBANK), auto company Mahindra and Mahindra (IN:M&M) and generic drug producer Dr Reddy’s Laboratories (IN:DRREDDY).
Henry Ince, investment analyst at Hargreaves Lansdown, adds that many fund managers continue to see India as a fertile hunting ground for ideas and many remain overweight.
While the potential for India to grow looks strong, valuation concerns should not be forgotten, “the current starting valuation in India is quite high and buying any asset when it is expensive compared to its history always presents a risk,” warns Brandreth.
Ince believes that “now is not the time to be overweighting India in your portfolio given how well it’s done, relative to other Asian and emerging market countries”. And he notes that some fund managers who invest in Asia have taken profits on some of their India exposure and exercise caution on valuation grounds.
For example, Austin Forey and John Citron, managers of JPMorgan Emerging Markets Investment Trust (JMG), said in the trust’s report on its financial year to 30 June 2023 that “a degree of investor optimism has pushed share prices for some companies well above the levels we would be happy to pay; we have reduced some of our exposure as a result.” But the trust still had 24.7 per cent of its assets in India at the end of September.
Meanwhile, Mehta admits that inflation is a risk because India is a large net consumer of commodities and an energy importer, and its economy is vulnerable to rising imported commodity prices – particularly those of oil and gas. “Rising import prices will also widen the current account deficit, weakening the rupee and compounding price pressures,” he warns.
The current government in India is pro-reform and business. It is expected to be re-elected in the general election next year, “however any surprises could prove to be a risk”, says Mehta.
Brandreth says passive funds should be the first port of call because their lower fees eat less into your returns, with options including the iShares MSCI India ETF (IIND). However, he adds: “At the moment we believe we can find active managers in India that can deliver better risk-adjusted returns than a passive alternative.”
Brandreth has been using broader Asia and emerging markets equity funds for India exposure and highlights Mobius Investment Trust (MMIT),which has around a fifth of its assets in India. It focuses on small- and mid-sized companies and traded at an 11.73 per cent discount to net asset value (NAV) as at 10 November, one of the widest points it has been at since 2020.Pune Stock
Ince suggests FSSA Asia Focus (GB00BWNGXJ86) run by Martin Lau and his team, who look for quality companies they can invest in for the long term. They like businesses with competitive advantages that others struggle to replicate, such as a well-known brand or the ability to raise the prices of their products without affecting demand from customers.Pune Wealth Management
Pacific Assets Trust (PAC) had 45.1 per cent of its assets in India at the end of September. The trust’s managers invest in companies which are positioned to benefit from and contribute to the sustainable development of the economies in which they operate. They aim to identify companies that manage risks and opportunities, and contribute to global human development without exceeding their ecological footprint. Its three largest holdings at the end of September were CG Power and Industrial Solutions (IN:CGPOWER), Mahindra and Mahindra and Tube Investments of India (IN:TIINDIA).
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