e-fundresearch.com: From a V-shaped recovery in Q1 to a summer full of global recessionary fears: What are your personal lessons learned from year-to-date market developments?
Sandrine Hadrys: The softness in Indian markets we have witnessed over the past year can be partly attributed to an anticipation that headline GDP growth would eventually grind lower after a period of sustained 6-7% growth in India. In the short term, financial markets are efficient and always forward looking and they were simply pricing this lower growth outlook in. While the GDP growth slowdown may persist in India for another couple of quarters, the recent move by the central government to cut taxes is a very bold step towards leaving excess cash in the hands of corporates. We feel this will result in increased economic activity and will put India back on path to its more normalised 6-6.5% GDP growth and markets reacted very positively to this announcement. We continue to learn that it is important to stick to our processes and philosophy at all time. We focus on finding great businesses and staying invested with them as they continue to generate long-term wealth for shareholder.
e-fundresearch.com: How did your strategy manage to perform in this challenging market environment and which particular investment themes have delivered the strongest (worst) performance contribution on a year-to-date perspective?
Sandrine Hadrys: As at 31 August 2019, the UTI India Dynamic Equity Fund was up 1.80% (Euro Class) YTD against 2.94% for the MSCI India Index (EUR). Over the last one year the Indian equity market has been polarised with large caps doing well, mid-caps doing poorly and small caps even worse. With this background, given that 33% of our portfolio is in mid-cap stocks we have witnessed underperformance over that period. One of the main detractors to performance has been not owning Reliance Industries, the largest weighted stock in the index, at 10.89%. With poor RoCEs, high debt on the balance sheet and highly negative free cash flows, Reliance does not meet our quality requirements. We remain consistent with our investment process focussing on identifying high quality growth companies as we have been doing over the last decade without getting distracted by the near-term performance numbers. Discovering mid and small caps with the right kind of quality attributes has been a source of strong alpha generation for us in the past. And we expect the same in the future as well. We have a very high active share and hence it is only fair to see some swings in our performance vis-a--vis the benchmark.
e-fundresearch.com: How optimistic is your view into the future and what obstacles and challenges should investors be prepared to overcome in the remainder of 2019 and early 2020? To what extent does your current portfolio positioning take those expectations into account?
Sandrine Hadrys: The Government is now embarking on a fiscal stimulus led by Infrastructure spending, particularly in Roads & Railways, with a special focus on Rural India. We have seen the RBI cut rates by 110bp in the past year since Feb ’19 and we expect two more rate cuts up till end of FY20. This reduction in borrowing cost together with the fiscal stimulus should see the growth revive in the country to somewhere in the range of 6-6.5% for the Financial Year Apr’19-Mar’20. The fact that the Indian market has not sold off heavily despite the slowdown points to the belief that the problems can be easily fixed by the Modi Government through a combination of lower interest rates and higher Govt Spending. In the coming months we will witness how the growth‐boosting measures of the government play out. In this environment, we will be true to our investment philosophy and continue to focus on the underlying businesses that are part of the portfolio rather than on the state of the market, global or local macro factors. Investors should keep an eye on oil price: as a barrel over USD80 for a sustained amount of time would not be good news for India – we are however far from this level at this time.
e-fundresearch.com: Why should investors consider an (increase in) allocation to your asset class and in particular your strategy in the current environment?
Sandrine Hadrys: India continues to be one of the most favoured investment destinations for global investors on the back of its sizeable demographic advantage, rising income & living standards, and steady economic parameters. It has the key ingredients in place to deliver consistent growth over many years to come. As such, it is expected to enter the top 3 economies in the world by 2030. The size of India’s economy and therefore its relevance cannot be ignored by active investors.
From a portfolio perspective, we have used correction in the stock prices over the summer as an opportunity to increase our exposure to select high quality companies. It is also worth noting that India has been trading at reasonable valuations vs the long term average of late. The recent tax cut announcements should feed through to a revival in the corporate earnings cycle, which should in turn be further good news for the market. This does give us more confidence about the direction of the market, however we would always stress we are a long-term investors and our strategy is anchored around buying high quality businesses and franchises aimed at generating long term wealth for investors throughout market cycles.