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Investment Director, Head of Emerging Market Equities

Modi: not out?

Investing in India over the past 18 months has been somewhat turbulent. In general, India has outperformed wider emerging markets in recent years, but in the last few months it has been a bumpy ride, with performance being driven by a combination of external macro drivers and domestic political considerations.

First the macro: once labelled as one of the Fragile 5 emerging market economies in 2013 during the Taper Tantrum, India had enjoyed a recovery in fortunes as the Central Bank worked to rebuild currency reserves and policy makers addressed the current account deficit that had left the economy so fragile. However, one of India’s key external exposures remains its status as an oil importer and thus vulnerability to rising energy costs. It was the rally in crude oil prices above $80 per barrel in September last year that sent the Indian market sharply tumbling along with the rupee. However, India has also suffered a degree of domestic uncertainty in recent months, especially connected to the upcoming elections this year.

One of India’s key external exposures remains its status as an oil importer and thus vulnerability to rising energy costs

In April and May nearly a billion people will go to the polls in India’s General Election. Famously, the election of 2014 – which saw the victory of Modi’s BJP party – saw a sustained rally in Indian equities on expectations of a pro-business government policy agenda. Indeed, four out of the last five elections have seen strong market performance in the run-up to the event because investors had become frustrated with coalition government and hoped for an administration with a clear mandate for reform. Although the upcoming election is unusual in that the current leadership is not a hamstrung collation, the outcome remains important as to whether India will remain under a reform-led BJP government with a clear mandate. To this end, many investors had responded negatively to polling suggesting an unclear outcome – this in large part explains the weak performance of the Indian market in the past months.

However, all of this has recently changed in the final run-up to voting – in large part a response to the recent military spat with Pakistan over Kashmir. In the wake of a bomb attack on an Indian army convoy on 14 February, events have led to a surge in support for the government and expectations for a BJP victory – with the market rallying robustly as it has moved to price in the more favourable outcome. Indeed since mid-February, $6bn of foreign inflows have surged into the market in just one month, eclipsing the $4.5bn of inflows during the entirety of 2018. This improving domestic political outlook has also come at a time where US bond yields have eased significantly and the ascent in the US dollar has been checked, both of which supporting emerging markets in the early months of this year.

Four out of the last five elections have seen strong market performance in the run-up to the event

With inflation running at an extremely low level of just 2%, the Reserve Bank of India also has plenty of room to cut interest rates and stimulate credit growth, offering a favourable domestic economic backdrop to support the market. With the improving external backdrop as well as clearer domestic political outlook, India has had an opportunity to recover recent underperformance against wider emerging markets and all eyes will now be on the election, the results of which are due in late May. The market is now clearly hoping for – and expecting – a decisive BJP victory and therefore continuation of market-friendly reform policies that have begun in Modi’s first term.

Investment risks

This Fund may have a high volatility rating and past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and your clients may not get back the original amount invested. Investments in emerging markets are higher risk and potentially more volatile than those in established markets. A majority of investments made by the Fund may be in smaller and medium sized companies which can be higher risk than those in larger companies. References to specific securities and sectors are for illustration purposes only and should not be taken as a solicitation to buy or sell these securities. Neptune funds are not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason the comparison index should be used for reference only. Please remember that forecasts are not a reliable indicator of future performance. The content of this document is formed from Neptune’s views as at the date of issue. We do not undertake to advise you as to any change of our views. Neptune does not give investment advice and only provides information on Neptune products. Please refer to the Prospectus for further details.

Investment Director, Head of Emerging Market Equities

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