Equities

Global Emerging Markets Seek to Overweight India

Global Emerging Markets Seek to Overweight India

Newton Investment Management’s global emerging markets portfolio manager, Rob Marshall-Lee has been bullish on India for over five years but still believes it has additional room to run.

The removal of high denomination bank notes from circulation in India saw the equity market hit a soft patch, which the Asian and emerging equities team at Newton Investment Management, a BNY Mellon company, used as an opportunity to increase positions.

Demonetization was introduced in November 2016 by Prime Minister Narendra Modi to discourage the purchase of large goods via the “black” economy.

Following the event, there was a small blip in the Indian equity market and some underlying economic data but it has since been accelerating back to trend, says Marshall-Lee.

“The clamp down on the black market seems to have had far less impact than many commentators would have had you believe, not least for the formal part of the economy. This is where most listed companies are most exposed.” 

COMING UP

He says the structural growth potential of India is supported by demographics (a large and growing working age population), low household credit penetration and Prime Minister Modi’s economic reforms.

“They continue to impress but he is playing the long game, which is boring for the shortterm speculator. We like what we see and view it as promising for unleashing strong underlying growth potential. This would allow well-positioned companies to grow future returns for a sustained period.”

Marshall-Lee believes short-term market weakness can be used to top up positions in emerging markets.

LOOKING FOR VALUE

He says: “The previous government was inept in our view, and got caught up in bureaucracy, whereas the Modi government is clear of vision. They are driven people with a long-term game plan.

“In our view, there are some excellent companies in India. Superficially it is on a slightly higher price-to-earnings ratio compared with some other emerging markets but we feel it deserves to be much higher because it appears to have the engine for growth to satisfy those future earnings projections.”

We believe emerging market strategies should be tilted towards consumer discretionary companies in India—ranging from jewelry, pizza, shampoo, tobacco and cars to packaged foods.

“As China has moved away from a commodity boom towards a consumer-driven economy it has become a more varied market. There is a still lot of fear around China and we are not invested in it on the basis of its GDP growth prospects,” explains Marshall-Lee.

On the heels of a trip to China where he visited five cities and met with local business people, consumers and government officials, he expects asset construction to decline in China over time and is steering clear of state-owned enterprises. This is based on their level of indebtedness and lack of consideration for minority shareholders. “The consumer economy is relatively ungeared,” he adds.

“So while we are wary of some capital misallocation (though not all is bad) and we are relatively bearish about the outlook for Chinese GDP growth, we remain happy to invest in specific industries and companies where we see sustained growth prospects. We term these “new China” areas such as Internet, healthcare, education and electric vehicles. Stocks in these areas have been some of our consistently strongest performers in recent years,” concludes Marshall-Lee.

Not FDIC-Insured. Not Bank-Guaranteed. May Lose Value.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, with $1.6 trillion in assets under management. It encompasses BNY Mellon’s affiliated investment management firms, wealth management services and global distribution companies. More information can be found at www.bnymellon.com.

All investments involve risk including loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

RISKS

Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries.

INDEX DEFINITIONS

Morgan Stanley Capital International (MSCI) Emerging Markets Index: The MSCI Emerging Markets Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance of emerging markets. The term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The index currently consists of 23 emerging market country indices. An investor cannot invest directly in any index.

“Newton” and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Investment Management (North America) Limited (NIMNA Ltd) and Newton Investment Management (North America) LLC (NIMNA LLC). NIMNA LLC personnel are supervised persons of NIMNA Ltd and NIMNA LLC does not provide investment advice, all of which is conducted by NIMNA Ltd. NIMNA LLC and NIMNA Ltd are the only Newton companies to offer services in the U.S.

Canada: Securities are offered through BNY Mellon Asset Management Canada Ltd., registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager and Commodity Trading Manager in Ontario. BNY Mellon Asset Management Canada Ltd is an indirect wholly-owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). BNY Mellon Asset Management Canada Ltd., 320 Bay St., Toronto, ON M5H 4A6.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular investment, strategy, investment manager or account arrangement. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. The Dreyfus Corporation, Newton (the strategy’s sub-advisor) and MBSC Securities Corporation are companies of BNY Mellon. ©2017 MBSC Securities Corporation, Distributor 225 Liberty Street, 19th Fl., New York, NY 10281.

MARK-2017-04-04-1368