Investment Adviser:

Reliance Wealth Management Ltd.

(June 2014)

How has the Fund performed recently compared to its peers and what areas in particular have done well?

The Fund’s performance has been very good despite volatile markets. The cumulative total return of WIOF India Performance fund was 18% versus the MSCI India USD index which was up 11% during the period 1st May 2013 – 30th April 2014. The Fund has mainly done well in areas such as Consumer, Pharma and IT. Equity markets move in cycles and every cycle has its favourites which see disproportionately higher valuations. The recent favourites have been companies in these three previously mentioned sectors - Consumer (consistent domestic growth), Pharma and IT (both having stable growth with export oriented businesses). Currency depreciation provided an added tailwind to Pharma and IT.

The depreciation of the Indian rupee has over the last few quarters been cited as a major problem by a lot of local and foreign economic analysts. But it has stabilised somewhat in the run up to the elections which ended in May. Do you think the currency is going to stay relatively stable in the post-election period?


More than the depreciation of the local currency it’s the volatility and the pace of depreciation which is more worrisome. As for investors and effects on stocks, in our position as portfolio manager we should be looking at ways of benefitting from any given situation rather than overly worrying about these macro things. We are invested in some companies which will benefit due to a fall in local currency while there are others which will not feel any direct impact from currency movements.


The rupee has strengthened following the strong mandate from the parliamentary elections. However, the central bank has recently reduced its import duty on gold so as to limit any unidirectional move in the currency. We expect the new government will want exports to continue to do well and therefore it is likely the currency will remain stable going forward. The low current account deficit in the last few quarters further strengthens the argument for a stable currency.


Regardless of whether it does or not, however, is it really such a large problem for investors if the currency starts to depreciate again? Would it not even present some opportunities under certain circumstances?


As the famous American investor Peter Lynch said “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you have invested”. We will therefore continue to remain focused on the stocks we hold. Having said that, we would like to reiterate that it is not currency depreciation, but currency volatility, which is a problem. And, as mentioned earlier, export oriented sectors like Pharma and IT will benefit from currency depreciation.


GDP growth in India has been slowing for some time and looks unlikely to reach the kind of high figures it was still posting a few years ago. Is this something investors need to be seriously worried about?


It’s easy to assume that the economy is not out of the slump that it is in. It is going to take a lot of measures, lots of steps to build up confidence, to bring us out of this situation. All economic indicators point to the fact that there is slowing industrial growth, slowing demand across industrial goods, and, it appears even consumption is slowing. So, it is going to take a while before we come out of this trough.


However, the new government with a majority mandate has definitely woken the positive animal spirits of the nation. The prime minister elect, Narendra Modi, is expected to successfully implement the development model used in Gujarat state (where he was Chief Minister for 10 plus years) at national level. Further, we don’t think the market is going to wait for the economic numbers to change but I think it will be a while before things start to improve. Long-term investors should make the best use of this and put money into equities taking a 2-3 year perspective.


Indian stocks were among the best performing in the world in 2012, posting exceptional gains of more than 25%, yet were down to a much more modest 6-7% for last year. Which year would you say more accurately reflects the performance potential of Indian stocks?


We wouldn’t want to categorise India’s potential in terms of either of those numbers. However, the country does have great potential given its young workforce, natural resources, domestic consumption potential, etc. The new government has a clear mandate (without coalition partners) and we remain very positive on the nation’s future prospects. If the economy revives and the GDP growth rate increases to 7-8% p.a., markets should see something similar to the 2012 returns in the medium to longer term.


We sincerely believe that if real GDP growth will be 7-8%, good, profitable companies will grow at rates four to five times higher.


With the elections now over, are investors holding out much hope for important economic and market reforms from the incoming government and if so, are they likely to see their hopes realised or will they be disappointed?


Hopes are definitely high with the new government having a majority mandate and the prime minister expected to successfully implement the Gujarat state development model at national level.


However, the immediate implementation of many decisions connected to development will be difficult at national level (given the large geography and population of India). Thus, any immediate expectations (ideas of a quick fix) may meet with disappointment. However, investors should not be left disappointed on the overall implementation of important economic and market reforms over the longer term.


In your opinion, what specific reforms does the government need to implement to help the economy and/or local markets?


Necessary reforms include, speeding up coal production, making the land acquisition process easier, reducing oil subsidies, boosting the textile sector and addressing supply side issues to reduce inflation. These would structurally improve the efficiency of the economy.


These reforms would help India in becoming more export oriented and replace critical imports with domestic production, revive the capex cycle, improve employment and reduce inflation. More importantly, they could structurally bring down the current account deficit.


The previous government took some moves to further open up the economy to foreign investment. What effect have these moves had, indirectly or directly, on Indian stocks?


Although the outgoing government did move to open up the economy for foreign investment, multinational companies were sceptical because elections were due. We expect the investments to flow in once the multinationals are clear on the new government’s policies.


How have the election results affected your investment strategy, if at all?


The current strategy is to focus on consumer and export related investment opportunities, as the scenario has been of low-GDP growth and high spending on socialist schemes. We continue to like these companies because their business model has undergone change. Many of these companies have become significant players in their industries. And while there is lot happening in beaten down stocks right now, it should not be forgotten that India is a country of one billion plus people, hence companies in the consumer sector catering to the domestic economy should continue to do well.


Having said that, although we will continue to focus on domestic consumption, with the new government in place we are expecting an uptick in corporate sentiment. Therefore, we will consider opportunities in capital intensive related cyclical sectors such as power, infrastructure and capital goods.


We will want to wait and see what the new government policies and thought process are before committing to any new strategy of sector. Moreover, we believe that in every bull run some new sectors and companies emerge as winners. We will continue to look for such opportunities, if and when they arise.


What, in your opinion, are the prospects for the Indian market over the next three to six months?


Predicting the markets in the short-term is always fraught with danger and we look at equities from a 3-6 years perspective. While equity returns have not been good in the recent past, history tells us that they have always been lumpy and cyclical in nature and they do make up for the lost time. What is needed is patience and belief in equities and good investment acumen to help generate excess returns in good times and provide protection in bad times.


In the near to medium term the government’s decisive mandate is extremely positive for equity markets. We expect investors/markets will give the government nine to 12 months to meet their expectations. Until then, investors will closely follow government announcements and action.


We believe the Indian stock market is well poised for a good bull run. The rally seen in the last few months is just the start. As we all know, equity, like other asset classes, goes through cycles. During the last six years Indian stock markets have virtually remained flat giving almost zero returns. The Sensex hit a high of around 21,000 in January 2008 and as of May was hovering around 24,500 (up just 16.7% in six plus years).


We therefore feel now is a very good time to invest in Indian equities, as the next four to five years may be extremely good for corporate India. Furthermore, domestic, foreign and retail investors are still underinvested in equity as an asset class and will be look to invest in the event of any corrections.



IMPORTANT NOTE: This report has been prepared for information only, and it does not represent an offer to purchase or subscribe to shares. World Investment Opportunities Funds (“WIOF”) is registered on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 17th December 2010 on collective investment undertakings as an open-ended investment company. WIOF believes that the information is correct at the date of production while obtained from carefully selected sources considered to be reliable. No warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information which may be subject to change at any time, without notice. Past performance provides neither a guarantee, nor an indication of future performance. Value of the shares and return they generate can fall as well as rise. Currency fluctuations, either up or down, may also affect value of the investment. Due to continuing market volatility and exchange rate fluctuations, the performance may be subject to significant changes over a short-term period. Investors should be aware that shares in the financial instruments entail investment risks, including the possible loss of the invested capital. Performance is usually calculated on the basis of the relevant NAV unless stated otherwise. Performance shown does not take account of any fees and costs associated with subscribing or redeeming shares. It is assumed that all dividends were reinvested. WIOF prospectus is available and may be obtained through www.1cornhill.com. Before investing in any WIOF Sub-fund(s) investors should contact their financial adviser / legal adviser / tax adviser and refer to all relevant documents relating to the WIOF and its particular Sub-fund(s), such as the latest annual report and prospectus that specify the particular risks associated with the Sub-fund, together with any specific restrictions applying, and the basis of dealing. In the event investors choose not to seek advice from a financial adviser / legal adviser / tax adviser, they should consider whether the WIOF is a suitable investment for them.