Stock market performance was dominated by one country in 2014: India. Nerendra Modi was elected as Prime Minister in May last year and his strong pro-market, pro-business agenda is expected to pull India out of the dark at last. Indeed, the Indian stock market has risen strongly over the past year on the promise of political and economic reforms.
Modi is abolishing many archaic labour laws and incentivising competition between individual states, with the aim of re-building industries such as the diminishing manufacturing sector. For example, a business historically needed over 40 licenses to trade, and companies with over 50 employees were required to seek government approval before firing an employee. This was a significant barrier to growth, preventing companies competing on a global stage as they were reluctant to take on more than 50 staff. Indeed, over 80% of Indian companies currently have less than 50 employees.
Alongside a manufacturing renaissance, Modi is hoping to improve the country's infrastructure, including building 100 new smart cities. India has a strong relationship with Japan and many of Modi's reforms have been compared favourably with those introduced by his Japanese counterpart, Shinzō Abe. Modi has introduced three individuals to the cabinet, two of which are Japanese, with the sole purpose of maintaining the India - Japan relationship. As Japan has excess capital from its quantitative easing program and India is in need of capital investment, it is a mutually beneficial relationship. Japan is providing investment for infrastructure projects, including a freight corridor linking four key areas within India.
It is not just foreigners noticing these changes in India. After 10 years of avoidance, domestic investors are increasingly shifting their focus from property and gold, back to the stock market. India is largely self-reliant and not dependent on exports, so the slowing world economy is less of a concern than to many other emerging markets. With a dynamic government and a young population keen for change, we believe India at last has a chance to catch other emerging markets, especially China.
While the promise of reform was enough to drive the stock market higher last year, this year the strength of the stock market will rely much more heavily on improving company earnings.
Managed by Kunal Desai since December 2012, the Neptune India Fund has been one of the best performing Indian funds of 2014. The fund's exposure to firms which tend to perform better in a stronger business environment and a bias to medium-sized companies had a positive effect on performance last year.
The manager is underweight the large stocks which dominate the index as he feels they are heavily overvalued. Higher risk medium-sized companies are less covered by analysts so he finds more opportunity in this area to uncover companies overlooked by other investors. He is also particularly focused on companies exposed to the manufacturing sector in order to benefit from the sweeping labour law reforms. The fund has a concentrated portfolio of 46 stocks, which allows each to have a significant impact on performance, but it is higher risk.
The team expects significant divergence between emerging market countries over the next few years, with India one of the big winners; the country is on track to be the world's 3rd largest economy by 2030. Indian politics are notoriously volatile, and progress runs a significant risk of being de-railed if anything were to happen to Modi. That said, it would be very difficult to stop the many wheels of reform once they are in action.
Our view on this fund
We believe India could be one of the most exciting investment stories of the next few years. While the performance of this adventurous fund has been strong over the past year, Kunal Desai's track record is still very short. We would like to continue to monitor his performance before considering the fund for inclusion on the Wealth 150 list of our favourite funds across the major sectors.
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