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Tap into consumer growth at a discount via Aberdeen New India

Aberdeen New India seems well positioned to profit from Indian consumer growth
March 21, 2019

In April and May there will be a general election in India and some of the candidates' policies, such as subsidies and a reduction in the goods and services tax, have concerned investors. But this does not change the potential growth in this market over the long term.

IC TIP: Buy
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Wide discount to NAV

Long-term growth potential

Exposure to consumer growth

Focus on quality companies

Bear points

Potential volatility

Concentrated risk

"It’s likely we’ll see a gradual improvement in earnings growth, which would be supportive for equities,” says Sukumar Rajah, senior managing director at Franklin Templeton Emerging Markets Equity. “And in the longer run, the case for investing in India remains strong as fundamentals appear solid and long-term growth drivers give us reason to look at India in a positive light. Projected gross domestic product growth for 2019 remains relatively robust at 7.5 per cent, and is estimated at 7.7 per cent in 2020. India continues to benefit from secular growth drivers such as favourable demographics, infrastructure investment, urban consumption growth and increasing income levels.”

A way to tap into this potential growth is Aberdeen New India Investment Trust (ANII), which is trading at a discount to net asset value (NAV) of about 13.3 per cent. If over the next 10 to 20 years the Indian equities in which this trust invests do well and sentiment towards India improves, its share price could reflect this and the discount could tighten. It has in the past traded at tighter discounts to NAV.

The trust’s NAV return is not ahead of MSCI India index over one and three years cumulatively, but beats it over five. This is partly due to short-term underperformance – the trust’s NAV return is behind its benchmark so far this year but in most calendar years since 2012 it is ahead of it.

The trust has nearly a quarter of its assets in consumer shares and a similar amount in financials. The trust’s managers recently commented: “The Indian government has increased the tax incentives for the middle class and provided more grants to rural households. This should boost consumption and bode well for our consumer holdings, such as Hero MotoCorp (HEROMOTOCO:NSI), Maruti Suzuki (MARUTI:NSI) and Hindustan Unilever (HINDUNILVR:NSI). Private sector banks, such as Kotak Mahindra (KOTAKBANK:NSI) and HDFC (HDFCBANK:NSI), should benefit from potentially higher demand for consumer loans. In earning updates these showed signs of improved loan growth and pricing power as competition from the troubled non-banking finance companies has abated. We remain positioned in companies that will continue to profit from India’s long-term consumption trends.”

Indian equities may be volatile in the coming months in and around the election, and emerging markets such as India are generally more volatile due to the higher risks these areas entail. Aberdeen New India is higher-risk than broader emerging market funds because it relies on the fortunes of one market rather than being diversified across several. So if you do not have a large portfolio, meaning you could hold other emerging market funds alongside this one, a diversified global emerging markets fund would be a better way for you to get exposure to India.

This trust is fairly concentrated with its top 10 holdings accounting for over half its assets. If one of these does badly it would have a significant effect on the trust’s overall returns, although conversely if one does well it would be fairly beneficial.

There is also no guarantee that the trust’s share price will do better or that its discount to NAV will tighten – it has traded at wider discounts than its current level.

However, analysts at broker Winterflood comment that Aberdeen New India “is positioned to benefit from long-term trends in India that are driving growth in consumption and there is still a strong investment case for Indian equities despite macroeconomic headwinds. Its management team has continued to develop a solid track record through the application of its well-established investment approach. The emphasis on quality companies, particularly with regard to proven strong corporate governance, is sensible given the inherent risks associated with the Indian market. The discount offers some value.”

So if you have a large portfolio and high risk appetite, Aberdeen New India Investment Trust might provide a cheap entry point into companies and a market that look set to deliver strong growth over the long term. Buy.

 

Aberdeen New India Investment Trust (ANII)
PRICE453.5pGEARING4%
AIC SECTOR Country Specialists: Asia PacificNAV523.3p
FUND TYPEInvestment trustPRICE DISCOUNT TO NAV13.30%
MARKET CAP£268mYIELD0.00%
No OF HOLDINGS44*ONGOING CHARGE1.25%*
SET UP DATE9/12/04**MORE DETAILSaberdeen-newindia.co.uk
Source: Winterflood as at 19 March 2019, *Aberdeen Standard Investments, **AIC.

 

Performance
Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)
Aberdeen New India NAV651112
Aberdeen New India share price652113
MSCI India index115692
Source: Winterflood as at 19 March 2019.

 

Top 10 holdings (%)
Housing Development Finance9.3
Tata Consultancy Services8.1
Infosys6
Kotak Mahindra Bank5.3
ITC5.1
Hindustan Unilever4.2
Container Corp of India3.8
Nestlé3.7
Piramal Enterprises3.5
HDFC Bank3.3
Aberdeen Standard Investments as at 31 January 2019

 

Sector breakdown (%)
Financials23.9
IT18.9
Consumer staples17.9
Materials15.3
Healthcare7.2
Consumer discretionary6.8
Communication services2.1
Real estate2.1
Industrials1.8
Utilities1.1
Energy1.0
Cash1.9
Aberdeen Standard Investments as at 31 January 2019