Liontrust India Fund

Over the first quarter of the year, the Liontrust India Fund returned 9.3%, versus the MSCI India Index comparator benchmark’s 4.1% gain*.

The Indian market began the year much as it had finished the previous quarter, in recovery mode. With life steadily returning to normal after the extreme dislocations of 2020, social mobility was increasing and companies reporting increasingly robust outlooks. Moreover, February brought a surprise from the much-anticipated budget speech, which outlined a much more pro-growth fiscal strategy than in recent years, and the market responded accordingly with cyclical shares in particular benefiting from the renewed optimism. However, as the quarter came to a close, a rapid resurgence in Covid-19 cases saw a retrenchment in the market as expectations rose for a return to targeted lockdowns in key urban areas.

For the first time in years, the Finance Ministry announced a major spending plan, looking to both support and facilitate the economic reset underway in the aftermath of Covid-19. Key features of the $500bn package included an increase in capital expenditure of 26%, a commitment on reforms such as strategic divestment – including state-owned banks – and an increase in foreign ownership limits for the insurance sector. But perhaps the most attractive (and market-pleasing) feature of the announcement was the absence of tax hikes. The increase in spending will be generated through an increase in the deficit and sale of government stakes in key sectors. This marks a clear reversal of the fiscal contraction of recent years and sets the stage for a potential re-ignition of the long-awaited domestic investment story – the notable absence of which has disappointed investors in recent years.

The primary beneficiaries of the increasing confidence in domestic recovery were stocks in the materials and industrials sectors. The budget offers the prospect of simultaneous private and public investment cycles for the first time in a decade, following on from a period of steadily declining fixed-capital investment – in stark contrast to the rapid growth seen 2004-2012, driven by very strong growth in public investment, in turn leading to a private investment cycle. The current environment holds similar potential, with low interest rates and high affordability creating attractive conditions in the residential property market, which has been stagnant for many years. The financial sector also stands to benefit, where a lack of investment demand and credit availability has soured investor appetite in recent years. A recovery in growth has already seen a positive turn in the credit cycle with higher quality players having spent several years cleaning up their portfolios, leaving private lenders such as ICICI Bank and Axis Bank well positioned to see their fortunes improve as the backdrop improves.

The drivers of the Fund’s performance were primarily stock selection in three key sectors – materials, financials and IT. The Fund is overweight the materials sector, which was the top performing sector of the quarter, but in particular the large holding in chemicals producer Deepak Nitrite rose strongly in the quarter driven by a very strong operating backdrop as product prices have risen alongside global economic recovery as well as supply bottlenecks across the commodity complex. Cement companies Ramco Cements and Shree Cement also enjoyed a strong quarter buoyed by recovering domestic demand. In financials, the Fund’s overweight position in banks was rewarded as the sector responded to improving asset quality – in particular holdings in ICICI Bank, HDFC Bank and State Bank of India supported outperformance in this sector. Finally, the IT sector provided strong relative returns for the Fund, notably smaller-sized companies Persistent Systems and Cyient continued to recover faster than the rest of the sector driven by further closing of the extreme valuation discounts that developed during the pandemic market sell-off.

Several new positions were initiated in the quarter including aluminium producer Hindalco and auto-parts manufacturer Motherson Sumi Systems. In the property sector, a move was made from Prestige Estates to DLF based on preferred geographical exposure, and a holding in Godrej Consumer Products was switched into parent company Godrej Industries to take advantage of a potential closing of a valuation discount.

The return surge of Covid-19 cases in India at the end of the quarter (and into the second quarter-to-date) is extremely sad and unwelcome. The return of lockdown conditions in key cities will of course see a retrenchment in the growth recovery witnessed over the last 12 months. However, as it currently stands, we would expect that the degree of lockdown will be less severe than previously witnessed and with a high-degree of behavioural adjustment already made on the part of both producers and consumers by way of inventories and distribution channels, somewhat mitigating the renewed adverse impact of the virus. Increased vaccination penetration will clearly help throughout the year, although progress will be considerably slower than that witnessed in countries such as the US and UK. We expect these developments to provide a pause in the positive economic momentum and investment outlook for India rather than a derailment and expect further growth recovery in the second half of this year.

Discrete years' performance (%)**, to previous quarter-end:

*Source: FE Analytics as at 31.03.21

**Source: FE Analytics as at 31.03.21.

KEY RISKS

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

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The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.