How the fastest growing economy in the world could add spice to your portfolioContributor Ian Cowie
Why india could add spice to a globally-diversified portfolio
The recent re-election of a market-friendly government raises hopes that India can sustain the highest growth rate of any major economy in the world (OECD: India Economic Forecast 2019). Factors including a young population, relatively low labour costs and a growing middle class are all positive for investors.
JPMorgan Indian Investment Trust plc was the first investment trust to focus solely on this country and it remains the largest in AUM (J.P. Morgan Asset Management, June 2019). This fund benefits from local knowledge and long-established leadership; both its portfolio managers were appointed in 2003 (J.P. Morgan Asset Management, June 2019).
During the last decade, JPMorgan Indian Investment Trust plc has more than doubled investors’ money but the shares continue to be priced at a double-digit discount to their net asset value. On one fundamental measure of value, Indian shares look cheap. So, despite strong growth in the past, there may be further to go.
Add spice to your portfolio with exposure to the fastest-growing economy in the world
India is the fastest growing major economy in the world and may become the largest one within a decade, according to global experts at the Organisation for Economic Co-operation and Development (OECD). A young population and a long-established legal system that recognises property rights are among factors helping India grow faster than other emerging markets, including China (Business Today, May 29, 2019).
If gross domestic product (GDP) continues to rise at its current rate of 5.8% per annum in the first quarter of 2019, this measure of economic output would double in less than 12 and a half years. Could some exposure to this sub-continent add spice to your portfolio?
Political stability and economic reform
While the past is not a guide to the future, one reason to hope recent progress could be sustained and economic reforms may be continued is political stability. India re-elected reforming Prime Minister Narendra Modi in May, 2019 (The Times, May 24, 2019: Modi increases majority in world’s biggest election). While political uncertainty may reduce investor confidence elsewhere, at least there is a degree of continuity on the sub-continent of India. Modi gained an increased majority for his Bharatiya Janata Party (BJP) in the world’s biggest democracy, with an electorate of 930m people.
Modi’s second term as prime minister gives grounds for hope about further progress from his programme of market-friendly fiscal and regulatory reforms." In particular, you have asked whether this clashes with the later paragraph headed 'Further To Go' where we say: "While the recent election hit the headlines, economic factors might be more important to investors’ returns in future. Mr Shroff said: “While continuity of Prime Minister will be helpful, in the longer run we see no particular correlation between which party is in power and the pace of GDP growth in India." The aim here is to allow the reader to form her or his own view about the influence of politics on economics - always a somewhat subjective issue but essential to the topicality of this piece - within a positive or helpful context for prospective investors, including Mr Shroff's expert assessment. Two or more views make a market!
Managing risk and reward
Investors willing to accept the higher risks of volatility - or fluctuating share prices - that often accompany hopes of greater growth in emerging markets may consider gaining cost-effective, professionally-managed exposure to India via a pooled fund, such as an investment trust. In addition to sharing the cost of dedicated research and stock selection, investment trusts diminish the risk inherent in stock markets by diversification; they spread individual investors’ money over dozens of different businesses, reducing shareholders’ exposure to setbacks or failure at any one company. The aim is to minimise risk and maximise returns.
JPMorgan Indian Investment Trust plc (stock market ticker: JII) was the first investment trust to focus purely on companies in this country when it launched in May, 1994 (J.P. Morgan Asset Management, June 2019), and it remains the largest Indian investment trust. It aims to provide capital growth by outperforming the MSCI India Index and invests in a diversified portfolio of businesses listed on the Bombay Stock Exchange (BSE) but will not invest in other countries of the Indian sub-continent, such as Sri Lanka. This trust has the ability to use borrowing to gear the portfolio to up to 15% of net assets where appropriate. Full disclosure: I have been a shareholder in this trust since June, 1996, when it was called Fleming Indian and I paid 66p per share. They are priced more than ten times higher than that at 776p at the time of writing: June 8, 2019.
Local and long-established expertise
Rajendra Nair and Rukhshad Shroff have been the portfolio managers of JPMorgan Indian Investment Trust plc since 2003. According to independent statisticians Morningstar via the Association of Investment Companies, this investment trust has delivered a total share price return of 10% over the last year; 82% over five years and 122% over the last decade (Association of Investment Companies statistics at 8.6.2019). Despite these facts, shares in JPMorgan Indian Investment Trust plc continue to be priced 11% lower than their net asset value (NAV).
That means buyers of shares can obtain £1 worth of underlying assets for 89p or a discount of 11%. Given the past and present, what about the future? Mr Shroff said: “The long-term growth prospects in India remain very compelling, with some excellent companies. We maintain a strong preference for high quality growth franchises which will continue to take market share over time, even as the opportunity set itself continues to expand” (JPMorgan Indian Investment Trust plc 2018/19 Half Year Report).
Further to go
While the recent election hit the headlines, economic factors might be more important to investors’ returns in future. Mr Shroff said: “While continuity of Prime Minister will be helpful, in the longer run we see no particular correlation between which party is in power and the pace of GDP growth in India.
“What is more crucial is that over the past five years nominal GDP growth hasn’t fed through to earnings growth; market earnings have been essentially flat for some time now. We maintain the view that India’s economy remains at an early cycle stage” (JPMorgan Indian Investment Trust plc 2018/19 Half Year Report).
One way to assess whether shares are cheap or expensive is to express their price as a multiple of corporate earnings; the price/earnings ratio or P/E. This can be further refined to take account of its level in past, to give the cyclically-adjusted P/E or CAPE (CAPE via Star Capital, 30.04.19). On that basis, India has a CAPE of 22.7 while the global all-countries average is 24 and the equivalent figure in America is 30.6 (Star Capital, 30 April 2019) .
India is one of the fastest growing major economy in the world and political continuity established by the recent re-election of its government may help to sustain regulatory reform and financial progress. If the current rate of increase in gross domestic product is maintained, the Indian economy would double in a decade. Will you get your share?
JPMorgan Indian Investment Trust plc was the first investment trust to focus on this country and it remains the largest. This fund benefits from local knowledge and long-established leadership as both its portfolio managers were appointed in 2003. Despite more than doubling investors’ money over the last decade, shares in JPMorgan Indian remain priced at a double-digit discount to their net asset value. On one fundamental measure of value, Indian shares look cheap and there may be further growth in future.
JPMorgan Indian Investment Trust plc
Quarterly rolling 12 months - as of 31/03/2019
Past performance is not a guide to current and future performance. The value of your investments and any income from them may fall as well as rise and you may not get back the full amount you invested.
Source: J.P. Morgan Asset Management/Morningstar. Net asset value performance data has been calculated on a NAV to NAV basis, including ongoing charges and any applicable fees, with any income reinvested, in GBP.
NAV is the cum income NAV with debt at fair value, diluted for treasury and/or subscription shares if applicable, with any income reinvested. Share price performance figures are calculated on a mid market basis in GBP with income reinvested on the ex-dividend date. The performance of the company's portfolio, or NAV performance, is not the same as share price performance and shareholders may not realise returns which are the same as NAV performance.
Indices do not include fees or operating expenses and you cannot invest in them.
Benchmark Source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved, in or related to compiling, computing, or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI's express written consent.
Comparison of the Company's performance is made with the benchmark. The benchmark is a recognised index of stocks which should not be taken as wholly representative of the Company's investment universe. The Company's investment strategy does not follow or track this index and therefore there may be a degree of divergence between its performance and that of the Company.
Aims to provide capital growth from Indian investments by outperforming the MSCI India Index. The Company will invest in a diversified portfolio of quoted Indian companies and companies that earn a material part of their revenues from India. The Company will not invest in other countries of the Indian sub-continent including Sri Lanka. The Company has the ability to use borrowing to gear the portfolio to up to 15% of net assets where appropriate.
- Exchange rate changes may cause the value of underlying overseas investments to go down as well as up.
- Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems. Shares may also be traded less frequently than those on established markets. This means that there may be difficulty in both buying and selling shares and individual share prices may be subject to short-term price fluctuations.
- External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
- This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
- This Company may also invest in smaller companies which may increase its risk profile.
- The share price may trade at a discount to the Net Asset Value of the Company.
- The single market in which the Company primarily invests, in this case India, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies.