Jonathan Pines, manager of the Hermes Asia ex Japan fund, is reducing his weighting to India, following what he calls a “broad and indiscriminate” rise in stock valuations.
From the third quarter of 2013 to the end of June this year India’s Sensex index has risen some 58 per cent in dollar terms, with investors becoming more bullish about new prime minister Narendra Modi’s more business-friendly government.
“Although reforms help the economy and thus promote confidence which can provide an impetus to stock prices, even decisive and quickly implemented reforms are unlikely to rapidly help earnings,” says Pines. “And earnings are the ultimate long term driver of stock prices.”
Having used the sell off in the Indian stock exchange in August last year – prompted by concerns regarding the impact of tapering by the Federal Reserve – to boost the fund’s exposure to specific Indian stocks, Pines is now cutting his Indian exposure, selling down Bharat Electronics and Polaris Financial Technology.
“Reforms seldom help all companies equally,” says Pines. “Indeed reforms beneficial to India as a whole might actually be harmful to some companies. The companies that will do best from reform will those that are currently most hampered by bureaucracy, indecision, delays and the status quo.”
“Some of these companies are listed. However it is possible the largest beneficiaries of reform are small and thus not yet listed. In such cases the benefits of reform will accrue to original owners rather than stockmarket investors.”