US Edition JP Morgan Indian Investment Trust
224p +2p
Questor says BUY
ALTHOUGH Questor is still in defensive mode, it is important to have some positions that will outperform when the appetite for risk returns. This means looking at investments that have been particularly hard hit by the flight to safety.
One of Questor's tips of the year is the Templeton Emerging Markets Investment Trust, which is a play on global re-leveraging. The fund is exposed to a number of emerging markets across the world.
However, Questor believes that recent events in India have created a buying opportunity for investors with a higher appetite for risk. A pure India fund offers the potential for stunning rewards for investors who take a long-term view. It is, however, a high-risk play and this fact needs to be considered when you are
deciding how much – or even whether – to invest.
Questor recommends buying JP Morgan's Indian Investment Trust (LSE: JII) as a play on the country's continuing development. It can be bought as normal through your broker. It does not pay dividends, which are reinvested, and the annual management fee is 1.5pc.
Indian markets have taken a tumble after software group Satyam hit the news last week for all the wrong reasons. It has been at the centre of the country's largest-ever corporate governance fraud. Founder and chairman
B Ramalinga Raju admitted the group's accounts and assets had been falsified and its cash position significantly overstated.
"It was like riding a tiger, not knowing how to get off without being eaten," 54-year-old Ramalinga Raju wrote in his resignation letter.
Although there is the potential for further corporate scandals to be uncovered, the falls have created a buying opportunity for investors seeking a cheap way into a growth market.
Sentiment was already downbeat following the shocking terrorist attack in Mumbai in December. Tensions with Pakistan after the atrocities are another risk factor that has kept Indian markets subdued over the past month. Despite these events, Questor believes now is a good time to buy into Indian shares via a fund that will spread risk over a broad portfolio.
It is important to note that Questor owns a small stake in the investment trust being recommended today. It was bought at the end of 2003 at 103¾p a share. This means that the investment is still showing a gain of 116pc, despite the Indian stock market falling 56pc during 2008. This demonstrates the profit potential that exists in emerging markets.
Investors have not had a chance to buy into the Indian growth story at these levels since early 2006 and Questor believes it is an opportunity you should not ignore. Over the past 10 years the fund is showing gains of a staggering 531pc and, once the current economic turmoil starts to ease, the Indian growth story will be back on track.
It is important to point out the major difference in the Chinese growth story and the Indian growth story: India is less exposed to a slowdown in the US and Europe because a smaller proportion of its GDP is generated by exports. About 20pc of Indian GDP is generated through exports, with the figure being closer to 40pc for China. This means that domestic demand is more important and Indian companies are less affected by a slump in Western economies. However, this does not mean the country will not be affected by a global slowdown.
There is no doubt that India's GDP is slowing. According to the government the economy is expected to expand by 7pc in the 12 months to March 2009, after recording average annual growth of more than 9pc in the previous three years. However, it is important to note that the economy is still experiencing significant growth, despite this easing.
The Indian blue-chip Sensex index is currently trading on a price-earnings (PE) multiple of 9.3 times, compared with the
FTSE 100 on 7.75 times and the S&P 500 on 15.6 times. Questor thinks this discount to the US index is unwarranted. It is also important to point out that the Sensex was trading on a PE of 31 times at this time last year.
Questor is not predicting a return to valuations this heady – at least not in 2009 – but there is greater potential for multiples to rise in this market than in Western economies. In fact, 2009 could be the last year you are able to buy the Indian market on a single-digit multiple for quite some time.
The main portfolio constituent in the fund is oil and gas group Reliance Industries, which is India's largest non-state owned company.
The shares have been battered by the failing oil price and a shutdown in oil production at one of its offshore platforms, but production is expected to restart by the end of this month. It may also start gas production at its largest discovery off India's eastern coast by the end of February. Both of these will be positive catalysts for the shares.
There was also good news from Infosys on Tuesday, which constitutes 8.5pc of the fund's portfolio. The outsourcing
group posted a 33pc jump in third-quarter profit, much better than expected.
Questor believes that the
long-term growth story for India is still in place and investors with a sensible time horizon could make significant gains by buying at today's level – but once again Questor highlights that this investment is riskier than
most – but offers greater rewards.