India has become one of the most popular destinations for investment amongst emerging markets and there is no better way of understanding the country’s prospects than by visiting it and meeting the companies and decision makers that are leading this economic revolution.

Last autumn, Ashburton launched the Chindia Fund, a fund which invests solely in Indian and Chinese equities. It was the first fund of its type in the UK and one of only a handful world-wide.

Visiting India therefore provided us with an opportunity to gain further insights into the economic potential of the country and to use that knowledge to help us re-appraise our investment strategy for the fund. What did we find? Well, the conclusions drawn from our most recent visit are that there may be some short term falls to take into account; however, over the longer-term, India continues to provide massive potential for investors.

Political and economic picture

Our weighting in Indian stocks has been reduced for the time being to take into account the current state of the market.

The visit to the sub-continent enabled us to assess the political situation and the economic picture first hand. Our trip took us to Mumbai, the old commercial capital, where many of the banks are based and where we had a briefing from the Reserve Bank of India; to Bangalore, home to the new India, the centre for outsourcing, software houses and the servicing firms and to Delhi, the capital and political heartland.

We met with representatives from companies as varied as textiles makers, watchmakers, biotech firms, consumer goods companies and software houses. Throughout, we were impressed with the senior management we met and all of them we discovered were keen to meet us — such is the desire to attract foreign capital into the country.

Government policy key

In India, government policy drives the stock market to a far greater extent than one finds in the West. Therefore, if you intend to invest in the country to any significant degree, you need to understand the political situation. This, it's important to note, is unfortunately bedevilled with short-term measures designed to grab the popular vote and win elections.

The Indian economy is also an unusual model. In general terms, economic growth begins with agriculture and manufacturing sectors and then the service industries develop. Yet in India, it is the service industries that have been the driving force behind its recent economic success.

More recently, however, there has been evidence that manufacturing is trying to catch up and is enjoying success for the first time in decades — good news for the industry. But on the downside, it has also become one of the root causes increasing inflation in the country.

Inflation 'a concern'

There is no doubt that inflation is a concern in the short term. The current rate of GDP is over nine percent and there is a need to cool down the economy to help bring inflation under control. While the government and Reserve Bank are mindful of this, they are also determined to avoid a repeat of what happened in the late 90s, when the Reserve Bank increased interest rates, tipping the country into a recession.

So, while the Reserve Bank is trying to take some of the liquidity out of the market, it is cautious of triggering another recession.

On the horizon, the retail sector is looking extremely promising. While visiting the country, senior management from WalMart was in the country discussing possibilities, while UK group Tesco is also expressing an interest.

Hurdles to growth

Foreign investment from the retail giants will help India to develop its infrastructure and distribution capabilities, which are also hurdles to its growth.

Our investment strategy toward India was reaffirmed as a result of our visit. Inflation is a concern in the short term and the overheating economy needs to slow down. However, this setback should not mask the medium to long term prospects for the shrewd investor in a country that has so much potential as it emerges from its rural economic origins.

Jonathan Schiessl is investment manager and Asia Pacific specialist. Nick Lee is director of investment and fund management.
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