It’s no understatement to say I’m a bit of a sports fan. Thanks to a very understanding wife, I spend every other weekend watching my beloved Chelsea play football and, in between times, I’m not adverse to the odd round of golf or cricket match.
One of the few sports I’m not so keen on is Formula One, but a quote about it in the sports pages last week piqued my interest.
Vicky Chandhok, who heads the Federation of Motor Sports Clubs of India, was talking about the possibility that the Indian Grand Prix could be cancelled as the promoters, Jaypee Sports International, had been accused of not paying entertainment taxes in full for last year’s race.
Chandok said: “We are the world’s largest democracy and filing a public-interest litigation in any court is possible. However, this has happened many times before. You’ve had people trying to stop cricket matches… but the courts by themselves are just a system, and the judges do not take kindly to a sporting event being stopped, especially on the eve of the event.”
I love it when sport comes first – I was secretly impressed that the last coup in Fiji was rumoured to have been delayed so that people could see a rugby match – but this issue does highlight one of the big problems facing investors in India. As the largest democracy in the world, consensus and action over real issues is hard to achieve.
The global economic environment of recent years has been challenging for emerging markets in general, but India has been facing additional challenges on the domestic front, namely a high fiscal and current account deficit, high inflation and a slowdown in corporate capital spending as a result of policy inaction.
The interconnection between politics and economics frequently worries investors, and results in higher volatility in the stock and currency market. This was witnessed in the summer months. From the 22nd May, when Ben Bernanke first hinted at tapering, to the end of August, the MSCI India fell almost 30% at its low* and the Indian rupee reached all time lows, falling 24% against the dollar.
As Sunil Asnani, portfolio manager at Matthews Asia pointed out: “If the country could simplify its decision-making institutions, reduce bureaucracy and increase the ease of doing business, it would be able to attract long term strategic foreign capital that could make up for the trade deficit. However, it would be ambitious to expect such reforms in the short to medium term, and structural currency weakness factors are likely to remain.”
The shame of it all is that the Indian economy contains a greater number of professionally-managed, family-owned businesses than most other countries in Asia. But this point is hidden from investors by extremely negative political and economic newsflow.
However, on 5th September, a new governor was appointed to India’s central bank, and markets and fund managers have so far reacted positively. First State’s Angus Tulloch is one such manager. He said: “We have been encouraged by the recent appointment of Raghuram Rajan as the governor of the Reserve Bank of India. Mr Rajan has free market principles and appears to have the political savvy to know when they will be appropriately and effectively applied for the longer term improvement of the economy. He has already illustrated his skill, with measures to attract higher foreign exchange flows and provided a detailed outline for banking sector reform.”
Avinash Vazirani, manager of Jupiter India, agrees: “Rajan has shown himself to be a determined reformer, willing to press forward with unpopular decisions. His decision to raise interest rates took everyone by surprise and dismayed business groups, but he also lowered the cost of funds for banks, and eased other restrictions imposed in July, designed to support the currency during recent market turbulence. Both economists and the government seem to be becoming more positive about India’s ability to manage its current account deficit.”
So perhaps, as Diwali approaches marking the start of a new financial year, the outlook for India is improving.
Despite all the challenges, I still think Indian equities are a good long-term bet. Unlike Formula One, which is expensive for teams and fans alike, Indian equities are very cheap compared with their own long-term average right now, and this perhaps represents a buying opportunity for higher risk investors.
Rajendra Nair, manager of JP Morgan India fund agrees: “Valuations of the Indian stock market are at near historical lows and we believe that investment into the Indian market offers upside both in terms of currency and market appreciation.” And so does Tim Orchard, portfolio manager of Fidelity Funds India Focus fund: “While there are concerns, valuations remain attractive compared with history and there are ample stock specific opportunities. I believe this is a good time to invest in high quality businesses with a long-term perspective.”
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’ views are his own and do not constitute financial advice.
*Source: FE Analytics, total returns in GBP 22nd May 2013 to 31st August 2013 – date of low was 28th August 2013.