How Hedge Funds are Now Playing India Following Shock Demonetization

Despite the shock demonetization, asset managers prefer investing in India in 2017

Local markets in India have shown mixed signals following Prime Minister Narendra Modi-led shock demonetization. However, a 2017 Credit Suisse Investor Survey, Shifting Tides, revealed hedge funds managing about $1.3 trillion in assets are now looking at India as their preferred investment destination.

US-exchange traded funds such as the iShares MSCI India ETF (INDA), the WisdomTree India Earnings Fund (EPI), the PowerShares India Portfolio ETF (PIN), and the iShares India 50 ETF (INDY) are among the most popular funds providing exposure to Indian equity. These ETFs were up 11.38%, 12.87%, 13.07%, and 11.70% YTD as of March 3, 2017.

The Indian government is courting foreign investment, and making the required attempts to improve transparency and accessibility. The country’s favorable demographics, rapid urbanization, and much-needed infrastructure development are key in putting India at the centre of investor focus. Half of India’s 1.25 billion population is under 25-years-old, and they’re rapidly urbanizing.

Two promising sectors in India in 2017

Two particularly promising sectors are infrastructure and consumer goods. “It’s a huge economy with a lot of people and they all need stuff,” said Mini Roy, managing director at Standard Chartered Bank for emerging markets, Africa, Asia, and the Middle East at Asia Society in New York on February 7.

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Naveen Aggarwal, India-U.S. corridor leader at KPMG India, sees opportunity in India’s young population, and its drive to connect far-flung regions by developing digital and transportation infrastructure means. “The modern Indian consumer is wanting to look better, travel better, eat better, and is aspirational, “Aggarwal said. “[There are] very different categories of products getting consumed today, ranging from automobiles to personal care products and restaurants.”

UK-based Edmond de Rothschild Asset Management SAS; with about $115.45 billion in assets; is bullish on India’ consumer discretionary and industrials sector. The asset manager’s $335 million emerging market fund has a 12% allocation to India. The fund house is cautious on consumer staples because of expensive valuations, said Ludovic Vauthier, Portfolio Manager with the company over a CNBC-TV18 interview.

Attractive consumer plays in India

India, which commands a 14.62% allocation in the Dow Jones Emerging Markets Consumer Titans 30 Index has its companies, ITC Ltd and Maruti Suzuki India Ltd. figuring amongst the top ten components of the index. However, ITC (NSE: ITC) and Maruti Suzuki (NSE: MSIL), trading at 26.7x and 22.5x forward multiples, respectively, could be expensive buys.

Amid industrials, we see Hindalco Industries (NSE: HNDL), Tata Steel (NSE: TATA), and Grasim Industries (NSE: GRASIM) trading at a 9.8x, 12.12x, and 13.3x forward multiple, respectively, compared to the sectors’ average of 24.6 times earnings (forward). These stocks are up 22%, 27.9%, and 16.5%, respectively, YTD.

Now, a vehicle density of just 20 per 1,000 people lends a lot of impetus to the automobile industry from India’s consumer discretionary sector. Within the automobile industry, Tata Motors (TTM) (NSE: TATAMOTORS) is relatively attractive from a valuations perspective. Forward valuations for this stock currently stand at 11.5 times earnings, compared to the industry’s average of 14.8x. The Indian exchange traded stock is down -4.7% YTD. The US-exchange traded ADR, TTM, is up 1.22% YTD. Despite unexpected short-term headwinds, Tata Motor stock should see sunnier days over the long-term on the back of factors including:

  1. It is the largest commercial vehicle manufacturer in India, and
  2. Government spending on infrastructure is expected to increase
  3. Jaguar-Land Rover or JLR has posted an annual revenue growth rate of 28% from fiscal 2009-16 for the company, while sporting a very healthy EBITDA margin of 15.7% (for fiscal 2016).
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