India: adding spice to the mix

India accounts for 23% of FAV’s portfolio and the top two overweight positions, both of which are Financials. In this note, we examine some of the key macro attractions of the that market, which help generate favourable tailwinds for investment. These include economic growth, socio-demographic changes, digitalisation and deregulation. We also use the two overweight, very different Indian case studies, to illustrate FAV’s investment approach and how it adds value in the process. In six months, the Trust’s NAV has risen to our previous July 2023 year-end estimate. We have now increased our forecast by 8%, reflecting performance to date, stock selection and the regional outlook.

• Asia’s appeal: The IMF’s January World Economic Outlook update once again highlighted the superior economic prospects (and lower downside revisions) seen in FAV’s investment mandate. We also see opportunities being created by new trade agreements, reduced regulation, long-term socio-demographic trends and urbanisation.
• Trust-specific appeal: FAV uses in-depth research to identify good businesses at fair prices, rather than making macro calls. Despite headwinds for many years, when market appetite was for large-cap, growth companies, FAV outperformed. More recently, market appetite has turned sharply in FAV’s favour.
• Valuation: FAV is trading at a 6% discount to NAV – broadly in line with its peers in the AIC Asia Pacific Smaller Companies Index (average discount 10%) and the broader Asia Pacific sector (average 7%), even though its one-year performance has been ca.18% better than that of the latter. Most assets are listed, making the NAV “real”.
• Risks: Geopolitical and economic tensions may affect investments, and also sentiment. If growth/momentum stocks are in favour (as they have been for much of the period since 2016), FAV faces a relative headwind, which it has usually, but not always, overcome. Volatility of returns is likely to be high.
• Investment summary: FAV has delivered superior long-term returns by being in attractive growth markets and adding incremental value using structured, in-depth analysis to identify mis-priced investments. Its “value” investments have actually delivered higher earnings growth than an average Asian “growth” company, as well as being lower-rated and providing a higher RoE. FAV is actively managed, and divergence from the benchmark performance, often for sustained periods, is to be expected.