India: Emerging from crisis

• After a significant downturn, the Indian economy is showing signs of revival

• Cyclical companies have seen their share prices revive in the short-term

• Investors need to look beyond the recovery to areas of structural growth

After a contraction of over 20% in the three months to June 2020, the Indian economy is now showing real signs of revival, notably in areas such as industrial production. Covid-19 case numbers appear to have peaked in September and, at the time of writing, infection rates are down markedly. With vaccine immunisation roll-outs now beginning, it is plausible that the worst of the crisis may have passed.

Stock markets have largely recovered, and Indian shares marked the arrival of 2021 by reaching record highs in early January. However, this masks considerable dispersion underneath. In this environment, it is important to assess the trajectory the recovery will take and its longer-term implications.

In the immediate aftermath of last year’s market slide, there were abundant opportunities. We could cherry-pick those companies that we had previously identified as having strong prospects, but where valuations had looked stretched, notably among high-performing internet-related names.

However, towards the end of 2020, the recovery moved out to more cyclical areas as excitement over a vaccine mounted. This often happens at times of ‘relief’, but we weren’t tempted to participate. Energy, for example, saw a significant rebound, but we prefer to focus on companies that meet our quality criteria.

Structural growth

We believe we need to remain focused on those companies likely to deliver long-term structural growth, not just a short-term bounce. In the wake of the pandemic, it is increasingly clear that the recovery will be ‘K’ shaped, with different parts of the economy recovering at different rates and times. Certain sectors will do very well – such as the internet, financial services and IT services sectors, while there will be a long tail of industries that continue to suffer. We have seen how companies in specific sectors, or those with high debt or poor business models, have been left vulnerable by the crisis.

Technology has been a clear beneficiary of the pandemic as lockdowns forced people online. Unlike China, there isn’t a large universe of listed internet stocks in India, but there are plenty of technology services companies and it’s here we see many of the most interesting opportunities. We took advantage of lower valuations last March and April to buy high quality internet or internet-related stocks such as InfoEdge.

Infoedge’s main business is online recruitment, which provides it with strong cash flows. Just as exciting is its portfolio of start-up businesses. It has built a sound reputation as an incubator, which means good small businesses want to partner with it. Its portfolio includes online insurance company Policy Bazaar and food delivery business Zomato, both exciting businesses that bring something new to our portfolio.

India has long been strong in IT and software services with a huge talent pool of IT engineers. At a time when companies are increasingly investing in digitalisation, we believe this sector has been overlooked. As a result, it is possible to pick them up at lower valuations and the prospect of a compelling dividend yield. In this area, we would highlight groups such as Tata Consultancy Services and Infosys.

E-commerce is not well-represented in the Indian market, but companies such as Hindustan Unilever are benefiting from the move online. The group has created an online platform that doesn’t just sell its own products, but also third-party brands. The company combines strong local knowledge with international experience, which has proved a recipe for success in the Indian market.

Strong getting stronger

This ‘K’ shaped recovery also applies within sectors, with the strong getting stronger and the weak increasingly pushed out of the market. Weaker companies find it difficult to get funding and there is a trend of market consolidation, particularly in areas such as banking and real estate. This enables India’s leading companies to build market share. For us, this is a sound reason to maintain our focus on those companies with strong market positions that can build sustainable growth over multiple cycles.

The recovery is in progress, but as investors, we cannot only focus on the next few months. We need to look at companies as they emerge from this unusual period, ensuring they can thrive long into the future. There will be other crises, even as this one draws to a close: we need to find those companies resilient enough to withstand them.

Important information

Risk factors you should consider prior to investing:

• The value of investments and the income from them can fall 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.
• 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.

Other important information:

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