DNB Asset Management focusing on alternative high-quality stocks – with success
24 November 2014. The hopes of last spring have proven justified: the new Indian government is keeping its promises. In line with the new policies, tax injustice and corruption are being cleaned up, and in response the economy is now sending out positive signals. Not only is inflation falling markedly, leading to a recovery in consumer sentiment, transparency in resources pricing has also greatly improved.
The people of India were hoping for a fundamental change of direction from the new Modi government, and since he took office their expectations have found expression in improved consumer sentiment and an economic upswing. The markets have already factored in much of the anticipated improvement. The current figures are now confirming this trend in the medium term and giving rise to hopes that the new direction will lead to a sustained revival of the Indian economy and with it the investment climate.
The latest key figures are encouraging. For instance, inflation is on the way down, having fallen from double digits to a current rate of below 6%. This is due to falling oil prices, from which the population has clearly benefited, as well as static food prices, which is noteworthy given the unfavourable monsoon season. Consumer price inflation has firmly fallen behind the system interest rates after a gap of almost four years, thereby making real interest rates positive. The drop below this mark may spark a new wave of investment in Indian markets.
Government initiates reforms swiftly
The view that the political cycle is a decisive factor in determining trends in economic sentiment has now been entirely vindicated. As Parameswara Krishnan, advisor to the DNB India fund notes, "Investors' hopes were high after the new government came into power in May, and these hopes have now proven to be justified". The new Modi government has implemented the measures it heralded, moving swiftly to put in place a number of the promised reforms, leading to a genuine change of direction. For instance, the diesel subsidy has been abolished, and commodity pricing has been made more transparent, thereby signalling the regime's pro-market economy stance in a field of great importance for India as an importer.
In the field of taxation too the Modi government will bring about greater clarity, finally bringing to an end the absurd tax philosophy of its predecessors, whereby a high degree of tax heterogeneity was permitted. There is a high degree of probability that in the Indian federal structure a consensus will be reached on the implementation of a new unified value added tax GST, which may also contribute to a considerable curbing of corruption. Many have long been calling for this reform, and have ascribed to this one measure the potential to increase GDP growth by 1% or even more. However, in view of India's federal structure it is clear that the unified tax rate can only be implemented if the biggest states can be persuaded to endorse it. This may now be achieved. Eliminating other tax regimes Modi´s intention is also to increase the overall level of tax fairness. Accordingly he has thus far lived up to expectations that, as the first Indian premier with a broad base in the various different states, he would bring to bear a greater understanding of their sensibilities. However, it is above all in relation to the fraught issue of corruption that he has taken decisive and successful action, though eradicating it altogether will take a while yet. The foundations have nevertheless been laid, so that the courts can in future be expected to pass impartial judgement in corruption cases.
Using positive signals as an investment opportunity
All eyes will now be on the Congress Party, which suffered devastating election results and is now in the weakest position in its entire history. Only time will tell whether it can reassert itself. This giant country certainly needs an opposition party, but political reverses can never be ruled out. Narendra Modi is aiming to secure his place in the history books, and to this end he looks sure to continue pursuing his current path. As a result India will remain an attractive market. If the balance of payments deficit shows downward movement, this will give the markets additional impetus. Individual corruption cases will doubtless continue to crop up in future, but investors are already treating these positive signals as their cue to get involved.
DNB recognised this trend at an early stage. Right back in March Parameswara Krishnan, for many years the manager and adviser of the DNB India fund, drew our attention to the opportunities on the Indian market. Thus our expectation that India would come to represent one of the best growth stories of the decade has been borne out. DNB India invests in well-managed companies with a strongly entrepreneurial culture. The highly experience team applies a bottom-up investment strategy to select the best Indian names, among them enterprises such as JK Lakshmi Cements, Maruti Suzuki and UPL. Applying this approach DNB India has achieved noteworthy success during the course of the year, as demonstrated by our impressive annual figures. The fund has registered a year-to-date performance of 63.76%, as compared with a rise in US dollars of just 42.57% chalked up by MSCI India.
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