JPMorgan Indian benefitting as financials begin to turn corner – JPMorgan Indian delivered an NAV total return of 10.3% in the half-year period to March 31, 2019, slightly above the benchmark MSCI India’s 10% return. Indian equities performed well over the period despite relatively feeble earnings growth, which have been flat for some time now mainly on account of the troubles faced by the banking sector (principally non-performing loans) over recent times.
More recently, financials have been turning a corner with capital positions beginning to be rebuilt. JII attributed its outperformance over the half-year to sector allocation (stock selection was a detractor) where it holds a significantly greater proportion of financial securities compared to its benchmark.
Prime Minister Modi re-elected
The results of the 2019 general election were announced on 23rd May (after the March-end results period); The outcome was a victory for the incumbent BJP government led by Prime Minister Narendra Modi, which, for a time at least, removes the political uncertainty that is an almost permanent feature of the Indian scene. JII does not believe the market ever priced in anything other than a BJP victory.
The party is generally seen as being ‘pro business’ and the market’s initial reaction has been to rise. As ever, JII says growth in corporate profits will be the key determinant of investor returns.
Managers see no correlation between party in power and pace of growth
Rukhshad Shroff and Raj Nair, manager’s of JII, offered their take on India’s outlook following the election: “Prime Minister Modi’s retention of power in the recent general election and the majority won by the BJP Party has led to a stronger mandate for the incumbent. However, while continuity of Prime Minister should be helpful, at no point was the prospect of a negative general election outcome priced in by markets. Moreover, 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 has not fed through to earnings growth: market earnings have been essentially flat for some time now. The key reason is that the banking sector has been through a negative earnings cycle on the back of non-performing loans. Provisioning for bad assets is now at more realistic levels and capital positions are being rebuilt. Normalisation of financial conditions should result in an earnings rebound. The path towards higher returns looks much clearer and more achievable.”
Financials recovery key to restoring value to the market
“We remain of the view that this is an early cycle economy. While valuations may not appear to be cheap relative to historic levels, with forward PE around the five-year average but above the ten-year average, we think that is partly because the corporate earnings cycle is depressed. An economic recovery and normalised earnings would make valuations appear cheaper and the long run growth prospects remain very compelling.”
JII: JPMorgan Indian benefitting as financials begin to turn corner