What do emerging market fund managers make of Narendra Modi?

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Financials and infrastructure are among the sectors emerging market fund managers are focussing on as recent election results from five Indian states have overwhelmingly supported the party of Prime Minister Narendra Modi.

The country is forecast to grow 7.1 per cent in the current 2016/2017 year as Modi focuses on reforms, which last year included surprise demonetisation and will this year focus on a Goods and Services Tax.

Indian assets were not pricing the Bharatiya Janata Party’s success, says Jonathan Schiessl, CIO and lead manager of the Ashburton India Equity Opportunities fund, which has returned 39.6 per cent over one year and 83.8 per cent over three years, according to FE data.

“These results also conclusively set-up India for a period of political stability likely to last for at least seven years, unique in emerging markets and indeed globally.”

The country remains a domestic story, Schiessl says, driven by long-term structural drivers of demographics and urbanisation.

“While we have overweight positions in consumer-focused companies across a variety of areas, we have a particular focus on the auto sector.

“We also have an overweight to the industrials sector, which is playing into India’s efforts to roll out much needed infrastructure. Our investments will benefit from the large uptick in spending on roads, as well as the development of rail and logistics facilities.”

Gary Greenberg, head of emerging markets at Hermes Investment Management, says Modi’s substantive reforms, aiming to fix structural problems in its economy, contrast with the Chinese government’s recent tactic of short-term fixes to temporarily boost growth.

HDFC Bank and Power Grid Corporation of India currently feature in his top-10 holdings with the latter’s order backlog totalling $20bn to be acted on over the next four to five years.

Meanwhile, HDFC has been a pioneer in leveraging technology to expand its franchise in the vast, but nascent customer base of rural India,” Greenberg says.

The Global Emerging Markets fund that Greenberg manages, which has 13.4 per cent in India compared to 8.9 per cent in the MSCI Emerging Markets benchmark, has returned 50.5 per cent over the last year and 63.5 per cent over three years.

Andrew Keirle, portfolio manager of the T Rowe Price Emerging Markets Local Currency Bond fund, warns potential investors in Indian bonds should consider the hazards posed by the country’s “significant” bad debt problem and its political risks.

However, Keirle notes the Indian fixed income space has been gradually opening up to international investors in recent years, has a fairly low correlation to US treasuries and Indian government bonds have a higher yield than the bonds of many Asian peers.