Despite suffering significant health and economic consequences of Covid-19, India should nevertheless be on the radar of most investors. After initial lockdowns, the Indian government abandoned its strategy of virus eradication and turned its attention to supporting the embattled economy. This seemed to have worked. On most high-frequency indicators, economic activity is almost back to pre-Covid levels. September manufacturing PMI, for example, came in at the highest level since January 2012. Other metrics, like rail freight and power demand, are also pointing to year-on-year growth. As India gears up for a rebound in economic activity in 2021, we wanted to look at some long-term fundamental drivers of Indian equities and a way to invest in the space through the Mirae Asset India Sector Leader Equity Fund.
Structural tailwinds for Indian equities
Several key trends are providing fundamental support for Indian equities. First is growing domestic consumption, driven by favourable demographics, rising income and consumer leveraging. According to a recent report published by the World Economic Forum, India is poised to become the third-largest consumer market next to US and China by 2030. Increasing levels of household debt, facilitated by access to retail finance, also offer fundamental support to Indian consumption-based economy.
The improving regulatory landscape is another structural tailwind. The tax overhaul of 2017, for example, brought all states and union territories together to implement Goods and Services Tax (GST). A host of reforms in the financial sector have also been introduced under the Modi government. Implementation of a bankruptcy code, changes to foreign investment programs, efforts to clean up bank balance sheets all point to better economic prospects. More recently, the government introduced the long-awaited labour code, which consolidates 29 different codes into four.
Digitisation of the Indian society is also bullish for the Indian economy. India’s unique identifier (UID) called “Aadhaar” now covers over 1 billion people or 94% of the adult population. This creates a bedrock of financial inclusion. Growing amount of 3G and 4G subscribers, at over 500 million, provide the backbone for the digital economy.
Over the years, one of the biggest hurdles to India’s growth has been its untracked informal economy that constitutes roughly 85% of its $2.7 trillion GDP. With these digitisation and reform efforts, there’s significant potential for India to expand its economic base.
Mirae Asset India Sector Leader Equity Fund
One of the ways to get exposure to the Indian equity market is through a mutual fund. Plenty of asset managers offer actively-managed Indian equity funds or ETFs. For example, Aberdeen, DWS, Eastspring, Franklin Templeton, Pictet, PGIM, and Matthews Asia all have Indian equity investment products. For this article, we focus on one strategy: Mirae Asset India Sector Leader Equity Fund, managed by Rahul Chadha and Saniel Chandrawat.
Both portfolio managers have extensive experience managing Indian equities. As Chief Investment Officer at Mirae Asset Global Investments (HK), Rahul Chadha oversees the entire investment unit. Saniel Chandrawat manages several funds at Mirae, including the Mirae Asset India Sector Equity Fund, the Mirae Asset Asia Pacific Health Care and the firm’s India Infrastructure fund.
The Mirae Asset India Sector Leader Equity Fund is managed to the MSCI India Index and targets long term capital appreciation. It invests mainly in equities and equity-related securities of sector-leading Indian companies with sustainable and competitive business models and strong execution.
Mirae team is well-positioned to actively invest in Indian equities through a combination of regional perspective with on the ground presence in the Indian market. The Mirae Asset India Sector Leader Equity strategy has outperformed its benchmark in 12 out of 14 calendar years since inception.
The opportunity set for the fund is around 4,000 stocks listed on Indian exchanges, as well as American Depositary Receipts (ADRs) and Global Depository Receipts (GDR). After quantitive screening, the universe is narrowed down to roughly 450-500 stocks at which point the team conducts thorough fundamental analysis. The team also considers ESG characteristics and undertakes risk budget analysis before constructing the portfolio.
At the end of October 2020, the portfolio had 40 holdings, with top-15 positions accounting for about 62% of the portfolio. Financial Services is the largest sector exposure, followed by Information Technology. The two make up almost 50% of the Fund. Infosys is the largest single stock position, at 9.3%, followed by two financials, ICICI Bank and HDFC Bank (31 October, 2020).
Long-term tailwinds supportive of India equity allocation
Despite health challenges of Covid-19, the Indian economy remains well supported by structural tailwinds and present an attractive long-term investment opportunity. For investors looking to leverage India’s long-term economic trajectory, the Mirae Asset India Sector Leader Equity Fund could be an option.