This marks my first annual statement for the Company as Chairman following Hasan Askari's retirement. As I noted in the 30 September 2022 Half-Yearly Report, Hasan stood down as Chairman at the Annual General Meeting on 28 September 2022 and I once again would like to express my appreciation for his leadership over the past 10 years. Together with Stephen White, who also stepped down as a Director, they have made extremely valuable contributions to the running of this Company. Stephen's successor as Audit Committee Chairman is Andrew Robson, who was appointed as a Director of the Company on 1 August 2022. David Simpson succeeded me as Senior Independent Director while Rebecca Donaldson was appointed Chairman of the Management Engagement Committee.

The Board travelled to India in February 2023, accompanied by the Investment Manager, to visit current and prospective investee companies. This trip left the Board in no doubt as to the investment opportunities in India which are available to the Company.

Overview

In an unsettling period for global markets generally, your Company's net asset value ("NAV") fell by 8.0% on a sterling total return basis over the year ended 31 March 2023 (the "Year"). This lagged the MSCI India Index (the Company's "Benchmark"), which fell 6.0%, also in sterling total return terms. The Company's share price fell by 8.9% to finish at 512.0p while the discount to NAV widened slightly from 19.4% to 20.2%, as at 31 March 2023. 

Macroeconomic concerns dominated the Year, as investors weighed up the optimism of a return to growth post-pandemic against the fears of rising inflation, the risk of global recession and the armed conflict which continues in Ukraine. All of this contributed to what was a volatile stockmarket backdrop.

This global picture appeared at odds with a more positive scenario experienced within India. As the pandemic subsided, there were signs of recovery in urban consumer demand and the housing market was similarly buoyant. Notably, the Reserve Bank of India ("RBI") forecasts GDP growth of 6% over the next fiscal year to 31 March 2024, placing India among the fastest-growing world economies.

While the RBI has pursued a tighter monetary policy, inflation was manageable despite being above the central bank's tolerance levels. The currency situation, however, was less encouraging. With a growing trade deficit and elevated oil prices due to the Ukrainian crisis making imports more expensive, the rupee weakened against sterling. Even here though, the RBI's deep currency reserves ensure that it can intervene to stem any drastic currency fall. Most of the obstacles facing India - higher oil prices and fears of a global recession for instance - have come from outside its borders.

Performance

Whilst lagging the Benchmark, one of the most significant drivers of positive relative performance by the Company over the Year was not holding in the portfolio any of the Adani entities (the "Adani Group"). As I mentioned in the 30 September 2022 Half-Yearly Report, the Adani Group dominated Benchmark returns in 2022, driving India's equity market higher over much of that year, and weighing on the Company's relative returns as a result. Your Investment Manager studiously avoided the Adani Group - its subsidiary companies do not meet stringent quality criteria and your Investment Manager has had long-standing reservations over governance, viewing the collective Adani Group as opaque, complex, and highly leveraged, and with elevated valuations not supported by fundamentals.

A US short-seller report, accusing the Adani Group of stock manipulation and accounting fraud, preceded a sharp share price fall, benefiting the Company's relative returns. In the Board's view, this episode vindicates your Investment Manager's consistent approach to the Adani Group and underscores why good corporate governance matters as part of the overall assessment of environmental, social and governance ("ESG") factors when making investment decisions.

Another knock-on effect from the Adani Group's share-price fall was that better quality securities, which had struggled for much of the Year, once again started to find favour with investors. This shift benefited many of the Company's quality holdings with more defensive characteristics.

Elsewhere, the Indian stockmarket witnessed weaker share price performance from sectors that were more sensitive to interest rates, among them the quality growth internet stocks that were added to the Company's portfolio in 2021. Despite being in the 'pre-profit' stage, your Investment Manager selected these companies because of their strong market positions, competitive advantages, cash-rich balance sheets and capable management. However, as the interest rate environment shifted early in 2022, these types of companies were sold off by investors despite exhibiting strong fundamentals.

Other rate-sensitive areas were also impacted. Real estate stocks fared poorly despite the Company's holdings delivering robust pre-sales growth. The Investment Manager is confident that the portfolio is positioned in property companies that will benefit from industry consolidation.

In a period of higher interest rates and inflation, as witnessed during the Year, one would typically expect quality stocks to be more resilient. However, with global macro factors such as geopolitical risks shaking up markets these fundamentals have been largely ignored. Growth stocks favoured by the Investment Manager were disproportionately sold off and value stocks rose sharply for much of 2022.

That said, it is worth highlighting that, in a turbulent market as seen in the first three months of 2023, your Company's core quality names held up well and several of the previously underperforming growth stocks had already begun to recover towards the end of the Year.

The Board is supportive of the Investment Manager's view that a focus on quality should benefit longer-term returns. Unlike the broader Indian market, these companies, in aggregate, have historically delivered consistent double-digit earnings growth. Their ESG metrics are also superior compared with those included in the Benchmark. While the underperformance relative to the Benchmark is still disappointing, the Board has noted the recovery in performance in the final three months of the Year and remains optimistic that the quality stocks held within the portfolio will deliver attractive returns in time.

A more in-depth discussion of the portfolio performance is contained in the Investment Manager's Review.

Environmental, Social and Governance

I am pleased to note that the Company's portfolio was recently rated "A" under the MSCI ESG Ratings. This reflects well on your Investment Manager's consistent efforts to engage with the companies held within your Company's portfolio and efforts to drive improvements on various issues. More details on your Investment Manager's ESG process can be found in the Investment Manager's Report and Case Studies, as well as in the latest Annual Report. A Sustainable Investment Report for the Company is also published every six months and is available at: abrdnnewindia.co.uk.

Outlook

India remains one of the world's fastest-growing economies, sustained by a stable macroeconomic environment. Supportive government spending, a revival in consumption and an easing of supply chain bottlenecks are likely to provide a buffer against rising interest rates and a likely global slowdown.

With a pro-growth budget for the 2024 fiscal year, there is increasing focus on India's industrial policy, as the country seeks to entrench its position as a global manufacturing hub. The domestic economy is in the early stages of a cyclical upswing. Inflation is easing, and there is good momentum in real estate, infrastructure development and consumer spending. The Board is optimistic that companies with strong fundamentals favoured by your Investment Manager, those with pricing power, a competitive advantage, balance sheet strength and steady free cash flow, will thrive in such an environment.

That said, we must remain cogniscent of the risks. Stockmarkets remain volatile and the external pressures on India have not eased. However, the Company's core quality holdings should still deliver resilient compounding earnings growth, even as global macro conditions stay weak. The consistency of earnings growth of the portfolio continues to be healthy. Fundamentals, including the ability to sustain margins, remain solid, supported by experienced management teams. In time, we would expect these positives to once again be reflected in better share price performance.

Over the longer term, both I and the other Directors are confident that India remains a compelling investment opportunity. Its large population, favourable demographics and evolving middle class set it apart from other emerging markets. Domestic consumption, urbanisation and infrastructure remain long term structural growth stories, coupled with the digitalisation opportunity.

Michael Hughes
Chairman
28 June 2023

Read the full Chairman’s Article here >

Discrete performance (%)

 

Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: abrdn Investments Limited, Lipper and Morningstar. Past performance is not a guide to future results

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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