India: a turning point?

It has been a difficult period for India’s economy and stock market. While there is still plenty to worry about, the country’s financial markets have started to set aside the recent turmoil in the Middle East and weakening currency. While the Aberdeen India trust remains careful in its allocation, it is possible that investors are starting to look beyond the short-term problems and refocus on India’s long-term potential. 

The US/Iran conflict continues to weigh on the Indian economy. Most of India’s oil is imported through the Strait of Hormuz, and its ongoing closure is a source of vulnerability for India’s economy. While its fiscal flexibility, stable inflation position and current account balances have given the government some ability to relieve the immediate pressure on India’s households and businesses, it cannot do so indefinitely. Higher crude oil prices place pressure on inflation, current account deficit, corporate margins, and the rupee.

Yet the stock market has been more resilient in recent months. This is partially explained by relatively encouraging economic data. The latest GDP figures surprised economists with their strength. Household spending has remained resilient, as has credit growth. India’s economy remains the fastest-growing major economy in the world, which creates a benign backdrop for many domestic companies.

Earnings growth has proved important as well. Prior to the conflict, Indian companies had seen earnings growth moderating, but this appears to have bottomed out as the economy has stabilised. However, the upcoming quarter will be important for assessing the impact of higher commodity prices on earnings.

Domestic investors have remained loyal to their local market, even as international investors have proved rather cautious. 

Valuations are no longer excessively expensive in aggregate. Following the correction earlier this year, the market now trades broadly in line with its long-term average. These factors have helped to support the market. However, pockets of the market continue to be expensive, more so in the small and mid-space.

A balanced approach

During this difficult period for Indian equities, the trust’s focus on quality and defensive areas has helped its resilience. Even though we are more optimistic on the outlook for the Indian market, we are retaining this emphasis in the portfolio, focusing on proprietary fundamental research to identify world-class quality companies with a long-term pipeline of growth.

The opportunities in the market remain uneven. There are still pockets of over-valuation in areas such as consumption, capital goods and infrastructure. With diffuse risks across the global economy, we believe it is the wrong moment to let valuation discipline shift. Equally, some parts of the small and mid-cap universe continue to trade above their long-term averages. 

Instead, we find financial companies the most attractive from the valuation perspective. These have also proved defensive during the recent market turmoil. Almost 30% of the portfolio is now invested in this part of the market, though the exposure is diverse, and includes banks, capital markets and insurance companies. This supports our ‘financialisation theme’, which looks at the continued development of India’s capital markets and the rising participation of retail investors. We see no sign that this long-term theme is slowing.

The war in Iran has also helped galvanise the Indian government on energy independence. Energy transition and security was already a theme in the portfolio, and the Iran conflict is just the latest demonstration that India, as is true for many other countries, needs to wean itself off fossil fuels. It is investing huge amounts in the transition to cleaner energy and renewables, and that is driving plenty of opportunities for investors. The trust holds companies such as InteGrid, ONGC of India and Petronet. The need to build new energy infrastructure also supports our ‘Building India’ theme.

More recently, we have been building up our healthcare positions in the trust. This spans hospitals, pharmaceutical companies and medical devices. As wealth increases, the population is spending more on healthcare. This area is also less vulnerable to any weakness in the wider economy. 

The trust retains some exposure to the consumer, but it is a more complex area in the current environment. The long-term trajectory for the Indian consumer is positive, with rising wealth levels and more spending on branded goods. However, it is more exposed to an economic slowdown, and we remain selective in our holdings.

We have also taken this opportunity to add to a few growth names, albeit where valuation is comfortable across our six core themes.

AI

India has been seen as the ‘anti-AI’ trade. The theory runs that its software and outsourcing companies may be disrupted by artificial intelligence. This is an unfair characterisation. India is building out data centres in the same way as many other countries and has a range of companies that can benefit from its growth. We hold telecom and networking solutions group HFCL, for example, which is seeing a growth in demand.

Nevertheless, we remain underweight the IT sector overall. We have sought to reduce our exposure to AI-related stocks, particularly given the recent volatility. As in other markets, valuations may have got ahead of reality and there are still a range of risks on AI adoption. We have also exited names such as Make My Trip and Info Edge, believing the long-term competitive landscape has shifted. When we look across Asia, and the volatility of the AI theme, India stands out as relatively stable.

Naturally, we continue to look at the impact of oil prices and a potential energy shock on the companies we hold and on the wider Indian economy. Nevertheless, India has demonstrated resilience, across consumption, corporate earnings, and among domestic investors. The long-term growth story for India remains firmly in place, even if the current environment requires selectivity. The trust will continue to focus on high quality, well-run companies that are positioned for future growth.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information
Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.

• Past performance is not a guide to future results.

• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.

• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.

• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.

• The Company may charge expenses to capital which may erode the capital value of the investment.

• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.

• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.

• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.

• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.

• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Investment objective

To achieve long-term capital appreciation by investing in companies which are incorporated in India or which derive significant revenue or profit from India, with dividend yield from the company being of secondary importance.

The full investment policy is available for download on the Company's website.

Other important information:

The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any investments or funds and does not constitute investment research, investment recommendation or investment advice in any jurisdiction.

The Aberdeen New India Investment Trust PLC Key Information Document can be obtained here.

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.

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