Market review

Over the six months ending 30 September 2023, the Company’s net asset value (“NAV”) total return increased by 13.2% in sterling terms, while the MSCI India Index increased by 17.1%. The bulk of the underperformance can be attributed to the fund’s holdings in financials, consumer, and energy sectors. The biggest contributors were the large active position in real estate and stock selection in health care.

The global equity market saw an exceptional amount of volatility over this period. Investors fretted over higher for longer interest rates in the US and the stuttering pace of China’s economic recovery. India bucked a downward trend to emerge as one of the best-performing major equity markets, pushing ahead of the broader Asia-Pacific ex-Japan region, global emerging markets, and developed markets.

In rising markets such as the one we have seen in India over the interim period, quality as an investment style – which your Company follows – tends to underperform initially. This has been broadly consistent with how the fund has performed in the past. We would point out that despite lagging the benchmark, the financial health and prospects of the portfolio’s holding companies remain robust as ever.

Market and Performance overview

India’s economy is in an enviable sweet spot. While resilient to external headwinds, domestic conditions are getting better. Inflation has retreated to manageable levels; factory output is rising steadily; the government is leading the charge to build more infrastructure while consumer spending is gradually getting better. The housing market has also become more affordable. All of these factors coalesce into an encouraging outlook for the Indian economy and has underpinned the strong display in the equity market.

Two major themes have dominated Indian stocks over the period: first, a sharp rally in small and mid-cap companies that predominantly make up corporate India. Secondly, as we mention above, quality companies have suffered in this rising market where investors chased stocks that have performed well in the short term without considering the company fundamentals. Both of these themes have had mixed impact on the fund’s performance.

The small and mid-cap rally benefitted your Company’s holdings, including real estate developers Prestige Estates and Godrej Properties. Both companies are owned by reputable local families and have held up well through the earlier property crisis, posted robust pre-sale numbers on a long overdue recovery in residential property sales. Other names that contributed to relative performance on the back of this rally include our diversified healthcare exposure in hospital chain Fortis Healthcare, diagnostics provider Vijaya Diagnostic Centre, contract biopharma manufacturer Syngene International and pharmaceutical company JB Chemicals & Pharma. All of those companies also posted strong results and continue to have robust financial positions and competitive edge. Electrical wires and cables manufacturer KEI Industries also performed well on improving market sentiment towards the company’s ability to capitalise on industry demand.

The underperformance in large-cap quality names was most pronounced in our core holdings in the financials and consumer sectors, namely HDFC Bank and Hindustan Unilever, respectively.

HDFC Bank completed its long anticipated merger with HDFC in July. We believe in the long-term potential of the merged entity, trading as HDFC Bank, in terms of revenue and cost synergies. The stock, however, weighed due to market rebalancing following the completion of the merger. It continued to lag in subsequent months after disclosing weaker-than-expected growth and returns in the post-merger proforma financial statement. We believe the share price is currently undervalued in relation to the potential the company has and will closely monitor the post-merger execution.

Within financials, the portfolio is skewed towards banks that assume lower lending risk and remain attractively valued. As a result, performance was affected after non-banking financial companies outperformed the banks as their growth prospects turned more promising in a potential peaking of the interest rate cycle. Specifically, not holding Bajaj Finance was costly. Your Company does, however, hold housing finance provider Aptus Value Housing Finance, which contributed to performance and we have built our position in the stock this year following an encouraging meeting with the management.

Likewise, in the consumer sectors, we lean more towards companies in consumer staples in line with our investing style as they tend to deliver steadier returns compared to discretionary names. The main staples holding, Hindustan Unilever, lagged the market due to lacklustre results as its pricing growth slowed on account of easing inflation in the country. The company, however, is still seeing volume growth and its margins are both resilient and ahead of peers thanks to its reach and penetration. We think Hindustan Unilever is poised to benefit from its dominant position in rural India once demand there recovers. Discretionary names performed better and our lower exposure cost us. While not holding companies like Tata Motors and Zomato detracted, the fund enjoyed positive contribution from the other auto names Mahindra & Mahindra and Maruti Suzuki and jewellery retailer Titan Industries.

Finally, in the energy sector our exposure to Aegis Logistics succumbed to profit taking following a strong run influenced by higher oil prices and healthy company earnings. On a positive note, one that re-emphasises our preference for quality, not holding industry bellwether Reliance Industries offset some of the underperformance from Aegis. The company still has not met our quality and corporate governance criteria. We also remain unconvinced about the returns generated from its underlying businesses.

Portfolio Activity

While we remain committed to our long-term quality investment approach, we have been proactive in our portfolio activity to insulate the trust from downside risk and to position it for gains from sectors and themes that are enjoying structural and cyclical tailwinds. In anticipation of the US economy eventually losing steam next year and sparking a US-led recession, we have trimmed our weight in IT software and services holdings Infosys and Tata Consultancy Services. The US is a key market for both companies where it is likely that corporate IT spending will be affected.

On the other hand, we have built our positions in the industrials sector by adding to names such as KEI Industries and ABB India. We also initiated Siemens, one of the key international capital equipment manufacturers and distributors in India, feeding into a diversified array of demand across sectors. This is in line with the Indian government’s push to build more infrastructure where we expect these names to be beneficiaries. We also introduced Coromandel International within the materials sector, which is a farming solutions provider that is likely to benefit from a reversal in rural and agricultural demand in India.

In anticipation of widespread recovery in consumption, we added to our positions in Tata Consumer Products and Titan, both of which have performed well since initiation prior to the review period. These additions were funded with our exits from low conviction names such as FSN E-Commerce Ventures (Nykaa) and Crompton Greaves Consumer Electricals.

During the period we repaid approximately £4 million of the Company’s short-term bank borrowing. The market is very expensive, due to rising valuations, while interest costs remain high. With these factors in mind, lower gearing seemed a sensible option.

Outlook

India is currently one of the best emerging market opportunities as the world remains in a wait-and-watch mode on interest rate policy trajectories. India’s early stages of a cyclical upswing are supported by moderate inflation, an expected pickup in consumption demand, relative geopolitical stability, and the “China plus One” strategy making the country an attractive manufacturing destination.

While the macro picture looks promising, it is never without risk. India's external balances remain vulnerable to oil price volatility. The outcome of the 2024 parliamentary elections poses a key risk, though the market broadly expects Modi to retain power. In addition, there could be a reversal of high valuations and the rotation benefit that India has enjoyed.

However, despite these near-term obstacles, we remain positive on India over the long term. The Company’s downside is well protected given our quality focus, and our defensive holdings are in a good position in case of profit taking. Furthermore, any correction in the market would be an opportunity to add to the holdings. The consistency of earnings growth of the portfolio remains healthy and individual company fundamentals, such as pricing power, strong balance sheets and the ability to sustain margins, remain solid.

Kristy Fong and James Thom
Investment Managers
22 November 2023

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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