Indian small and midcap companies will be boosted by an expected wider domestic consumption, urbanisation and consolidation growth, Ocean Dial said.
David Cornell, chief investment officer at the UK asset manager and manager of its India Capital Growth Fund, argued that investors should enter the market in a timely fashion ahead of this growth.
“Timing the market is not something that you should ignore,” he said.
But not everyone is quite so optimistic.
Japan’s Nikko Asset Management determined, in its recent emerging markets analysis, that growth in India remains weak.
“The fiscal slippage from -3.3% of GDP to -3.8% is not insignificant, but not enough to outweigh the benefits of badly needed growth,” it said.
The country continues to experience feeble consumption and investment due to an undercapitalised banking system, with shadow banking still frozen up and credit shaky because of non-performing loans that have risen to 9.1%, Nikko AM noted.
Cornell believes however that the shadow banking freeze only applies to weaker entities. He explains: “Growth has certainly deteriorated during a period of re-adjustment to a cleaner operating environment.
“New lending, recognition, and bankruptcy resolution norms are rebooting the banking sector which has been forced to report a much more transparent picture of the quality of its loan book.”
Tax cut offers opportunities
But Nikko AM points to the possibility that a recent and significant corporate tax cut by prime minister Nerendra Modi’s administration could lift both earnings and growth over time.
The corporate tax rate was cut from 30% to 25%, worth $20bn (€17.77bn) (or 0.7% of GDP), which is estimated to lead to an immediate 9% boost to FY20 profits and boost growth by 65-200 basis points over two to three years, Nikko AM said.
This has led to a jump in equity trade volume, which have become moderately more attractive after the tax cut, while bonds show better value, it added.
Cornell commented: “There is a visible mismatch between backward-looking indicators and the likely near-term trajectory of the economy.
“This mismatch in perception has created multiple opportunities from a valuation perspective across a range of sectors and industries.
“This is particularly acute in the small and midcap space where well-managed companies with strong earnings potential are on offer at attractive prices.”
India Capital Growth Fund
The India fund invests predominantly in listed mid and small cap firms across the country and has 34 holdings.
The closed-ended company was established to take advantage of long-term investment opportunities.
Since inception in 2005, the fund, with £104.1m (€118.85m) of assets under management, has returned 11.1% annually.
It underperformed its benchmark, the S&P BSE MidCap Index, returning -9% NAV year-to-date versus -6.09%.
The benchmark performed 80.41% over five years compared to the fund’s rebased NAV of 62.68%.
Last Word research on Indian equity funds