Liontrust India Fund

Q1 2020 review

Over the first quarter, the Liontrust India Fund returned -31.3%, versus the MSCI India Index’s -26.4% loss.

 

The first quarter of 2020 was one of the most extraordinary in recent times, with the global economy and stock markets suffering a collective blow unprecedented in living memory. Although the detection of a novel strain of coronavirus was made on 31 December in Wuhan, China, the issue remained one specific to China during the first half of the period, with the S&P500 hitting fresh all-time highs even in late February. However, with the onset of March came the reality that confirmed cases outside of China and neighbouring countries had begun to increase rapidly and that early hopes of containment had proved optimistic. By the end of the month, almost all major economies had suspended business as usual and had enforced various degrees of social distancing and stay-home orders to reduce the spread of the virus. The effects of these dramatic measures have already been revealed acutely in economic data, and although at the time of writing there are some tentative signs that confirmed cases and deaths are responding to these measures in certain key European countries − in particular Italy − there remains a huge degree of uncertainty over both the longevity and severity of the preventative measures and therefore of the overall economic toll of the global pandemic.

Needless to say, stock markets reacted extremely negatively to the developments, with almost all major global indices entering bear markets with extraordinary speed. Because of the global impact of the pandemic, losses were felt across markets and whilst emerging markets as a whole did indeed underperform developed markets, they did not do so by the degree normally associated with such powerful drawdowns. However, a significant part of this performance was due to the notable outperformance of the Chinese market due to a much earlier emergence from lockdown, and also the perception that the Chinese government has sufficient fiscal and monetary levers to effect economic recovery throughout the rest of the year. Elsewhere outside Asia, most emerging markets were hit considerably harder, so whilst China fell only -10.3%, several emerging markets sold off -40-50% in dollar terms. The sell-off was of course compounded by the decision of Saudi Arabia and Russia to abandon their OPEC+ supply cut agreement and effectively enter into a price war by increasing volumes into an already depressed demand environment. This saw the oil price collapse to $22.5 per barrel by quarter end, putting huge pressure on oil and commodity linked currencies such as the Russian ruble and Brazilian real. 

The Indian market largely tracked global peers, and although the market return did underperform both developed and emerging markets, it was spared the very worst that hit more commodity driven markets such as Russia and Brazil. The Indian economy had already been somewhat labouring under a sub-par growth rate during the previous year and so this recent crisis has been especially unwelcome. Whilst initially caught up in the general market sell-off, India then moved into a specific response in late March, with cities put into lockdown, with trains and flights suspected. Although the official case and death statistics remain low, it is widely assumed that the numbers are underreported due to the inadequacy of the administrative system alongside low testing capability. 

Given the severe hit to the economy, it was the more cyclical areas of the market that were hit the hardest, with financials, real estate and the auto sector performing worst, whilst more defensive areas such as consumer staples and healthcare were relative outperfomers. Given the financial sector was already attempting to recover from a liquidity squeeze last year, the crisis was particularly felt amongst smaller lenders that were already struggling for deposits. The Liontrust India Fund has a long-term outlook predicated on the recovery of the Indian economy led by a renewed investment cycle and domestic shift in portfolio allocations towards equities as the financial industry increasingly captures middle-class Indians. As such, the Fund’s domestic exposure and also allocation towards the mid-caps − long-term beneficiaries of the above themes − was ill-suited to the market conditions and extreme volatility through the quarter. The underperformance over the quarter was primarily driven by overweight sector positions in more cyclical areas such as industrials, financials and real estate, though somewhat mitigated by an underweight in energy and autos. 

Given the extreme volatility, we took the view that excessive trading was unwise, given that a sudden dollar funding crisis was leading to indiscriminate panic selling. Indeed, the strong recovery from oversold levels seen at the end of the quarter and into April reveals the rapidity with which losses can be recovered once policy responses have been announced and the incremental news flow on the virus has eased. That said, we did take the opportunity to exit two positions around the end of the quarter where we felt that the investment case had changed − namely sales in Equities Financial and Ashoka Buildcon. The proceeds were recycled into new positions in the chemicals sector (structurally preffered sub-sector of the Fund) with the addition of Sudarshan Chemical and Navin Fluorine.

 

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

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust India C Acc GBP

-37.8

0.5

-5.1

44.8

-8.1

MSCI India

-27.3

14.9

-1.7

36.1

-10.3

 

*Source: FE Analytics as at 31.03.20

For a comprehensive list of common financial words and terms, see our glossary here.

  

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.

Disclaimer

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.

Monday, April 20, 2020, 4:44 PM