India remains a key centre of economic stability, retaining its enviable status as the world's fastest-growing major economy. GDP for the first quarter of 2025 saw India's annualised growth rate pick up to 7.4%, a welcome confirmation of the economy's resilience after several weaker quarters in succession.
This easing in economic growth numbers over the previous 12 months had led to a simultaneous moderation in the increase in corporate earnings that prompted investors to question India's long-standing valuation premium, which is in large part justified by the market's high structural growth rates and corporate profitability. This questioning essentially focused on whether the slowdown in India's economy through the second half of 2024 was structural or cyclical.
The most significant impact to growth last year was undoubtedly from the vast and sprawling general election, which took place in seven phases between 19 April and 1 June 2024. The huge enterprise of a nationwide election in the world's largest democracy, by its sheer scale, tends to see a reduction in output, but this is further exacerbated by limitations on public spending and policy announcements, which sees government capital expenditures and budget execution sharply lower during the election period. This was further compounded last year by extreme heat in the months preceding the election and late, heavy monsoon rains after it. GDP growth rates of above 9% in 2023 duly gave way to incrementally lower quarterly numbers, with the nadir being 5.6% in the third quarter.
The steady improvement in economic data over the last nine months, however, has largely shown the slowdown to be cyclical in nature.
Policy support: from monetary easing to fiscal stimulus
Monetary policy has – until recently – offered a further headwind to the Indian economy. The cautious approach of the Reserve Bank of India (RBI) has been commendable in recent years and has in no small part been responsible for the macro stability India has enjoyed, as well as the rewards that come in the form of a more stable currency and lower bond yields. Having held interest rates at 6.5% for nearly two years, the RBI made its first cut in February this year with a reduction of 0.25%, followed by a similar reduction in April. Just as importantly, the central bank has sought to improve liquidity conditions in the banking system – which have been extremely tight – feeding through into a significant slowdown in bank credit growth to the economy. In June, the RBI surprised the market with a 0.5% cut, combined with a reduction in the amount banks must retain as reserves with the central bank. The swift and aggressive action seemingly amounted to a tacit admission that conditions have been too tight, and the RBI has thus moved to reverse this in a clear sign of support to economic growth.
Arguably, the most important factor in India's macro picture has been the continuous reduction in inflation, now sitting at 2.8% – the lowest rate since February 2019 and comfortably below the RBI's target of 4%. The weakness in the US dollar has also helped in this regard, and indeed across emerging markets in general, as central banks have been given valuable leeway to cut rates without the traditional concern of seeing their currencies weaken against the dollar and stoke inflation once again. Moreover, the encouraging early monsoon rains and solid forecasts for the rest of the rainy season bode well for ongoing reductions in food prices.
The combination of reduced inflation and interest rates, coupled with lower interest rates, has a clearly positive impact on the Indian consumer. While the first two terms of the Modi/BJP government were focused squarely on delivering crucial infrastructure investment, the February budget this year marked a clear turning point in its support for domestic consumption, offering a tax cut as well as other targeted cash transfers. In addition, the Central Pay Commission – a body set up roughly every decade to revise salaries, allowances and pensions of central government employees – is set to announce upward revisions that could see up to 30-35% increases in pay and pensions for roughly 11 million beneficiaries, a clear further boon to consumption.
The combination of tax cuts, cash transfers and pay hikes translates to around 2% of GDP in consumer stimulus.
Portfolio positioning: domestic growth and consumer recovery themes
One of the stand-out qualities of India's economy is the extent to which it is domestically driven, and therefore more insulated than most to the vagaries of the current US tariff policy. Therefore, evidence that domestic growth is indeed picking up is extremely welcome. India also demonstrates the highest correlation between nominal GDP growth and market earnings in emerging markets, meaning that investors buying the market are "buying the economy" to a much higher degree than anywhere else, where heavy reliance on exports means that stock markets frequently diverge from their underlying growth picture.
The extent to which Indian markets are being driven increasingly by domestic flows as opposed to foreign portfolio inflows has also steadily decreased India's market correlation with both emerging and developed markets – a highly attractive feature.
The Liontrust India Fund has continued to increase exposure to this incipient consumer recovery in a number of ways. Firstly, through increased weights in existing holdings in consumer discretionary stocks such as TVS Motor and Eicher Motors – both dominant in premium two-wheeler autos – as well as Eternal, the dominant player in both food delivery (Zomato) and quick commerce (Blinkit).
Eternal's share price came under some pressure earlier this year due to the broader macro slowdown as well as its aggressive investment plans deferring profitability by a few quarters. However, the stock has begun to recover well on the back of robust user numbers and an easing of pressure from competitor Zepto, whose aggressive recent discounting eased. Indeed, a position in Swiggy – the second player in the sector – was also added, with both players benefiting from similar trends of improving consumer health and Zepto's reduced threat.
Secondly, the portfolio is well positioned with respect to recovering credit growth – both through traditional banks and also through non-bank lenders. So-called NBFCs offer banking-like services and are regulated by the RBI but are not in fact banks – they play a critical role in delivering credit, financial inclusion and financing underserved sectors, especially in the SME sector, rural areas and with informal borrowers. Across the sector, we are seeing improved financial health, a turnaround in asset quality and rising profitability, with greater liquidity for the sector and lower cost of borrowing.
Positions in Shriram Finance and Chola Investment & Finance offer exposure to auto loans, whilst IIFL Finance and Bajaj Finance operate broadly across SMEs, consumer lending and household loans. Finally, the Fund remains overweight in the real estate sector, where lower interest rates are set to ease affordability constraints for buyers. Holdings in Godrej Properties and Prestige Estates are primarily focused on the mid-to-premium residential segment, where the impact of consumer stimulus will be felt most keenly, as opposed to the luxury segment, which has already seen extremely strong growth and is unlikely to see as much incremental improvement.
A structurally attractive investment story
Having seen something of a pull-back in the market since its recent peak in September last year that exactly tracks the moderating economic momentum in the economy, Indian equities are now responding well to the renewed pick-up in activity. We continue to believe that India represents one of the most compelling long-term investment opportunities due to its secular domestic growth story and increased insulation from the wider global economy.
KEY RISKS
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The Funds managed by the Global Equities team:
May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. May have a concentrated portfolio, i.e. hold a limited number of investments or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio. May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of a fund over the short term. Certain countries have a higher risk of the imposition of financial and economic sanctions on them which may have a significant economic impact on any company operating, or based, in these countries and their ability to trade as normal. Any such sanctions may cause the value of the investments in the fund to fall significantly and may result in liquidity issues which could prevent the fund from meeting redemptions. May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income. May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
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