Stock selection drives Aberdeen New India interim period outperformance

Stock selection drives Aberdeen New India interim period outperformance – Over Aberdeen New India’s (ANII) interim period to 30 September 2019, the company’s NAV rose by 6.1%, ahead of the benchmark MSCI India Index’s return of 0.8%. Performance was driven primarily by stock selection amid persistent financial sector woes.

FIscal stimulus improving sentiment

ANII noted: “Indian equities were flat in the six months under review. Nevertheless, compared to the wider Asia Pacific ex Japan region, which fell against a backdrop of a slowing global economy and heightened trade tensions, they proved resilient.

The re-election of the Bharatiya Janata Party with a larger than expected majority initially lifted the market,as it signalled continuity of government policies. However, surprise tax hike proposals announced during the Federal Budget, together with a lack of any stimulus package to boost consumption, rattled investors and pared back these early gains. Throughout this period the financial storm in the shadow banking sector continued to rumble on, dampening the performance of financial stocks, as credit growth moderated and liquidity tightened. In particular, the default by non-banking financial company (NBFC) Dewan Housing Finance Corporation and then fraud allegations against small lender Punjab and Maharashtra Co-operative Bank, renewed investor concerns.

In response, the Reserve Bank of India cut rates five times and proposed stricter regulations for NBFCs. The government unveiled measures to support investor and consumer sentiment including the consolidation of public-sector banks. To combat a slowdown in auto sales, it also deferred the increase in new registration fees and encouraged the scrapping of old vehicles. Near the end of the review period, stocks clawed back some losses, as the government slashed corporate tax rates. The stimulus measures propelled consumer staples stocks to put them among the biggest gains for the year while healthcare equities lagged the most.”

Manager’s outlook

“In the near term, concerns over the liquidity and solvency of the shadow banking sector, as well as slowing domestic growth and global macroeconomic uncertainty, will continue to affect the market. These factors were reflected in the cautious note struck by many of the company’s holdings for the short term in the most recent earnings reporting season. On a brighter note, above-average monsoon rains will likely boost rural incomes and, along with the recent Diwali festival, bode well for consumer spending. Recent corporate tax cuts have made valuations more attractive, and will help support a recovery, particularly in the financials and consumer staples sectors.

Notwithstanding its present challenges, India still has many structural drivers of long-term growth. It maintains a big domestic economy and an entrepreneurial culture. Furthermore, it stands to benefit from still-low oil prices and multinationals looking to relocate their factories out of China to avoid US trade tariffs. Its prowess in computer engineering makes it an increasingly important force as industries, ranging from automotive to finance, embrace digitisation.”

ANII’s top 10 holdings at 30 September 2019:

ANII: Stock selection drives Aberdeen New India interim period outperformance