Kate Lin: Even as China's stock market has fallen this year, Indian equities are on an upswing. As a result, the Indian equity market has taken a greater weightage in regional and global indices and funds. The resultant inflows, growing investor interest, and diversification have sustained an outperformance for the past few years for India. Could it become the next China? And what should investors expect?
Factors Driving India's Outperformance in Recent Years
We're talking to Ramanand Kothari, our senior manager research analyst, Rama. Thank you so much for joining us today. Shall we start with the performance of the Indian equity fund category in 2023?
Ramanand Kothari: Hi, Kate. The Indian stock market has sustained its upward trajectory from last year, showing robust performance as we approach the year-end. Notably, despite prevailing macroeconomic challenges such as high interest rates, inflation, and geopolitical tensions that have posed challenges for many emerging markets, India has demonstrated resilience and continues to be an appealing destination for investors. Also, like last year, the IPO market has been vibrant. Regarding the offshore India equity funds, within our coverage, nearly all of them have outperformed their respective benchmarks and category peers. Particularly, funds with higher exposure to small and midcap stocks have delivered a more stellar performance, surpassing their large-cap counterparts by a significant margin.
Expectations for India's Market in 2024 and Potential Drivers
Lin: With these and looking ahead, do you think the same set of drivers will push the market higher in 2024, and what other new factors will be at play?
Kothari: Sure. So we believe the growth story remains intact. India is the fastest-growing emerging economy, supported by robust economic, macro, and company fundamentals, combined with structural long-term themes at play. It is also encouraging to see strong participation from domestic players also. However, one big event to consider next year would be the upcoming general election during the second quarter, and we may witness higher bouts of volatility next year. From a valuation lens, some market segments may see derating on the back of their expensive valuations, especially if you see lower than expected growth. However, some correction has already occurred. Lastly, negative surprises caused by the ongoing global macro uncertainty could be a stumbling block for the India growth path.
Top-Rated Managers
Lin: And with these, how are our top-rated managers positioned to capture these trends?
Kothari: So two highly regarded offshore India managers, FSSA Investment Managers and Stewart Investors, are run by very talented managers Vinay Agarwal and Sashi Reddy, respectively. They are disciplined fundamental stock pickers who invest in high-quality companies with a long-term investing mindset. They stand out with their impressive knowledge of Indian management and the businesses they invest in and have stuck to their investment philosophy. Both managers prefer to run a high conviction portfolio and avoid excessively leveraged firms. Compared to peers, they have higher small and midcap exposure. As pure stock pickers, their portfolios exhibit meaningful sector and stock deviation from the benchmark. For instance, they remained considerably underweight in the financials, the largest sector within the MSCI India Index, and overweight in consumer discretionary and industrial sectors.
Lin: Wonderful. Thank you, Rama. For Morningstar, I'm Kate Lin.
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