‘Everyone loves India, no one owns India,’ was a phrase mentioned in passing to Asset Allocator recently.
We mulled this over a while and decided to test the theory: what with the stock market hitting highs and sentiment around its ‘demographic dividend’ making headlines in the financial press, surely this would be reflected in an increased allocation of capital from DFMs towards the country?
The answer to that question is no, not really.
To take you back a few months, we conducted a study in February to see how allocators can gain exposure to India. There are three main ways: emerging market funds, Asia-Pacific funds, and single-country funds.
For reference, India constitutes 18 per cent of the MSCI emerging markets index and is tied with Taiwan as the joint second-largest constituent of the benchmark. In Asia-Pacific, it’s a smaller player at just 12 per cent, owing to the relative dominance of Japan and China.
Running the numbers, we found the average weighting to India among the top five most popular EM funds in our database yielded a weighting of just 13.5 per cent – but this includes the Fidelity Emerging Markets fund, which is itself an MSCI EM proxy.
When this is removed, the weighting to India drops further to 12 per cent – indicating that the most popular active EM managers are structurally underweight here.
The mandate with the highest exposure to India is Federated Hermes Global Emerging Markets Smid, with 20 per cent.
Meanwhile, the other excessively-named fund in our database, Pacific North of South Emerging Market Equity Income Opportunities, allocates precisely zero to India – though this could be down to their search for yield above all else.
We spoke to a couple of DFMs about this and they agreed that India was one of the pricier regions across the emerging market universe.
“I think the long-term opportunities in India are really attractive, but everything has a price,” said Peter Dalgliesh, chief investment officer at Parmenion. “The expectation for earnings growth over the next 12 months is 17 to 19 per cent and that, in itself, is really, really attractive.”
However, he said that this doesn’t look terribly exciting when comparing the forecasts for Korea, Taiwan, and some parts of China.
“That means that we want to be careful not to be too caught up in that long term structural story of India, and be cognisant of what the other opportunities are available for investors in the nearer term,” he added.
Over-exuberance?
The lack of DFM investment in India is contrasted with the exuberance of domestic investors, which has in part propelled the MSCI India Index over 35 per cent this year.
“The availability of digital investment platforms has led to rapid growth in retail equity investment which has supported the market since 2021,” said Mali Chivakul, emerging markets economist at J.Safra Sarasin.
She said they’ve flocked into small and mid-cap names en-masse, as well as stock options trading, causing India’s securities regulator to voice concerns about potential bubble and retail speculation via derivatives.
“In our view, there is a good chance that the securities regulator could tighten regulations on derivatives trading, which will likely lead to a market correction.
“We’d be more comfortable entering the market once that happens,” she added.
A bit steep
As Chivakul points out, valuations in India are certainly on the pricier end of the spectrum, which is a potential red flag for some DFMs.
Mark Harries, chief investment officer at Square Mile, told us that India is very expensive and one of the most volatile markets in the world, so allocating to the region is “challenging”.
“It has also performed very strongly and usually that doesn’t make it the right time to buy,” he added. “Recently the Asian and Chinese markets, which have been very weak, have started to perform, as has the UK, and a cheap market often offers a better starting point."
Indeed Jonathan Unwin, UK head of portfolio management at Mirabaud, said the most common objection he hears when allocating to India was its valuation relative to other emerging markets – with a price/earnings ratio of 29x, compared to the EM average of about 13.
Unwin said that by definition this poses problems for value managers operating in the country.
He added: “It’s worth remembering that many DFMs will be benchmarked against the MSCI World index, of which emerging markets and India are a very small percentage, so any dedicated exposure to India may represent significant tracking error risk.
“A better understanding of how to negotiate the volatility, together with a more considered approach to India will come with time, and we expect to see increased participation in the country’s stock market as a result.”
Single country risk
Last time we picked out the very sporadic use of India-only funds by the allocators in our database.
Since then, we’ve seen no uptick of interest in these products: there remain seven Indian equity funds held in our database, and one Indian bond fund. And most of these are held by one allocator apiece, apart from Stewart Investors Indian Subcontinent Sustainability, which is held by two.
Daniele Antonucci, chief investment officer at Brown Shipley, said that the bar is higher for investing in single-country emerging market funds than it would be for more developed nations.
“One reason is sustainability policy; it needs to meet the same ESG criteria but you do have to be a lot more stringent for a lot of these funds,” he said.
“That will also mean a degree of concentration risk in our portfolios, which may run counter to our global, multi-asset diversification.”
Parmenion, for instance, uses Goldman Sachs Emerging Markets as a means of accessing mid-cap companies across the country.
Dalgliesh said he takes care to ensure that the underlying holdings of his Asia-Pacific and emerging market funds don’t double up, and having an India-only fund can help to spread that exposure.
