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Trust Insider: trusts for an undervalued India
by James Carthew on Aug 27, 2013 at 00:01
Many emerging market funds have been struggling this year but some of the worst performing have been those exposed to India. In part his can be attributed to the collapse in the value of the Indian rupee.
In March this year the pound/rupee exchange rate was c81, today it has crashed through 100 and still seems to be on a downward trajectory. The Indian stock market has been falling too. While there are some large exporters that will be benefitting from the weak currency, India has a balance of payments problem, in particular it is a net importer of fuel, and the falling currency is bad news for the economy.
Some commentators are comparing the current problems with India’s crisis of 1991 when it had to turn to the IMF for help and the rupee was devalued. Much of the blame has been laid at the government’s door. After embracing economic liberalisation in 1991 the pace of reform slowed.
Failure to invest in infrastructure, tackle bureaucracy and corruption have created bottlenecks in the economy that have held back GDP growth and helped fuel inflation. The BSE Sensex has fallen by c11% over the past month and is back at the same levels it was trading at five years ago. The more broadly based BSE 500 index has fared worse; off by 14% year to date and 22% off its November 2010 high.
The falls are making Indian equities look more attractive – the p/e on the BSE 500 is now 14.7x, well below its average for the past five years of 18.3x, and the market also looks reasonable value on price / book (2.2x vs. 3.0x) and yield (1.6% vs.1.3%). Bear in mind though that the likelihood is that forecasts for earnings and dividends need to be revised downwards as the economy stalls.
India’s problems are reflected in the performance of the investment companies specialising in this market. Some of the property stocks have become embroiled in litigation; Hirco (which is suspended pending clarification of its financial position) being a classic example.
Many infrastructure projects have stalled (Indian Infrastructure’s dam project seems to be no further forward than it was when I was having a go at the company in 2010). In fact the best performing funds this year are those that are winding themselves up (Eredene, Kubera and Trinity Capital). However, you may be thinking that at some point soon India will be oversold and then it might be worth having some exposure.
The largest and most liquid Indian fund, with a market cap of more than £300 million, is JP Morgan India (“JII”). Back in May JII’s shares were over 400p but they have now fallen below 290p, JII’s discount has widened to 15% and they are buying in stock.
JII was launched in 1994. By then the reforms that Manmohan Singh (then finance minister, now prime minister) introduced to liberalise the economy in response to the 1991 crisis had boosted growth and the stock market had risen almost fourfold.
However, JII was like many funds launched at the top of the market. It took five years for the share price to exceed the launch price and then the pricking of the tech bubble caused it to lurch back again.
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