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Jupiter's Vazirani: rural India will drive future growth
Jupiter fund manager Avinash Vazirani believes India's long-term growth trajectory remains in place despite the difficult economic backdrop.
Avinash Vazirani has run the Jupiter India fund for Jupiter Asset Management since its launch four years ago. The fund is on the watchlist for possible inclusion in Citywire Selection, our list of fund recommendations.
Despite the poor macro backdrop, Jupiter India fund manager Avinash Vazirani believes the country's long-term strong growth trajectory remains in place and that it will be driven by its rural economy.
Vazirani said that the country is experiencing a two-speed economy, with a pronounced industrial slowdown in the big cities countered by a resilient consumption story, particularly in rural areas.
The slowdown, political wrangling and bribery scandals have tended to dominate the headlines on India this year, masking the fact that the stock market is up 18% in local currency terms in the year to date.
He said: 'The macro situation remains quite poor and there are a number of domestic issues to deal with, but the micro scenario is great because the long-term story of poor people getting progressively richer is still intact and, if anything, is growing stronger.'
He also thinks the buoyant rural economy is being underpinned by a number of policy announcements made by the new government such as state electricity boards restructuring their debts and fuel prices being lowered.
Despite these initiatives however, he thinks the government and Indian Central Bank need to cut interest rates more aggressively and make further fundamental tax reforms.
'Between 150 million and 200 million Indians are directly dependent on "mom and pop" shops and the opening up of India to foreign retailers will have a huge impact on them. There have been some great steps by the government but the finance ministry and the Central Bank should be singing from the same hymn sheet and further reforms are needed.'
Vazirani expects capital gains tax to be abolished on stock market gains as well as the introduction of a new goods and services tax, effectively VAT, to boost annual Indian GDP by between 1 and 2%.
'I also expect to see the tax code simplified and all of these should act as positive triggers for the economy on the macro side.'
Vazirani anticipates that with GDP growth falling from 8.5% to around 5.5% this year the central Bank will need to ease monetary policy.
'We are hoping to see a turnaround in the industrial cycle and expect monetary policy easing. It is too tight at present and we think the bank should do more. The bank's view is that inflation is too high but we think they will have to cut rates aggressively. The longer they leave it, the more they will have to cut and this loosening should have a positive effect on India's business cycle.'
Vazirani is buoyed by the growth in household income and in real wages among the rural population, and he notes that wage growth is growing some 5 to 6% ahead of inflation.
'We are seeing a lot of spending on discretionary and consumption items and household expenditure growth is faster in rural than urban areas.
This trend is reflected in Vazirani's pronounced fund overweight to consumer goods, which makes up more than 30% of the fund. This includes his largest holding, Godfrey Philips, which owns the Marlboro cigaretter distribution rights in India as well as a brand new top 10 fund stake in United Spirits, the beverage group that will soon be owned by Diageo.
'Consumption growth is growing much faster than GDP and we particularly like brands, stocks with high barriers to entry and [those displaying] high cash generation.'
The £250 million fund remains underweight in industrials, oil & gas and basic materials but Vazirani remains positive on financials and particularly health care as he sees opportunities for investors as the government transfers health care provision to the private sector amid ever increasing demand from India's growing middle class.
'We are in line with our financials exposure but we think [banks] will benefit from monetary easing. Unlike their western counterparts they have no derivatives and even though they have done well this year, we think they are grossly undervalued.'
Since launch at the end of February 2008 to the end of October the fund has returned 28% compared to the benchmark S&P CNX Nifty TR return of 4.3%.
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