US Edition JP Morgan Indian Investment Trust
306p -11
Questor says BUY
After the Indian election results caused a wave of euphoria in the country's stock market, Questor advised investors to hold fire on JP Morgan Indian Investment Trust – one of this column's tips of the year.
The froth came off the Indian market within a few days, but the market has fallen even further after a disappointing first budget by the new government. The Indian stock market lost almost 6pc when the country's spending plans were unveiled on Monday – the largest single-day loss for six months.
This has created a buy opportunity for investors wanting to invest in the development of one of the world's largest emerging economies.
Pranab Mukherjee, the new finance minister, forecast economic growth of 6.7pc in the current fiscal year and 9pc in 2011 and 2012.
However, the market was spooked by the largest fiscal deficit in 16 years, as well as the fact that rules for foreign investment in the banking sector weren't relaxed. There was also no news on privatisation of state-run assets. However, Mr Mukherjee yesterday clarified that he would sell stakes in state-owned companies at "opportune" times.
Things are not as bad as the market reaction would suggest. Mr Mukherjee estimated the budget deficit, which will hit 6.8pc this year, would decline to 5.5pc next year and then to 4pc in 2011 and 2012.
Another positive was the fact that there were welcome tax reforms, which should be positive for both business and individuals. He also announced a 1.79 trillion rupee (£2.3bn) programme to develop roads, telecommunications and power.
India's plan is to raise growth by increasing borrowing and it is not surprising that some investors are concerned at a time when risk aversion is on the increase.
Mr Mukherjee thinks that the deficit is a "risk worth taking" to stimulate growth. "The basic approach of the budget was to support growth because the global recession is set to continue this year," he said.
However, things in the garden are not all rosy. Mr Mukherjee's budget got a lukewarm reception from credit-rating agencies. Standard & Poor's said the fiscal deficit was "within the boundary" of their expectation, but Fitch Ratings said it did
not alleviate pressure on India's ratings.
The Indian blue-chip index, the Sensex, is now at 13,780. Macquarie Group has raised its April 2010 target on the index to 18,000, implying gains of about 30pc.
As Tom Stevenson pointed out on this website yesterday, the potential for economic growth in Asia is significantly higher than in Western economies.
He argued that Westerners have everything they need and spending is limited by crippling debt. However, in countries like India, there is low penetration of goods such as mobile phones and cars, so there are far more profit opportunities for businesses in these areas.
The trust's net asset value per share on Monday stood at 316.55p on a fully-diluted basis. Shares in this fund are up 37pc since their recommendation and they are a long-term core emerging market holding. Buy.
Garry White is a member of a share club which owns 955 shares in JP Morgan Indian Investment Trust.
Cape
189p -1½
Questor says BUY
Shares in energy and mining service group Cape are up 189pc since their recommendation at 65½p on March 12. However, this week's news on debt was pleasing and the shares remain a buy even after these gains.
Usually, the group's debt position increases in the first half of the year due to seasonal factors, but the company said in its trading update on Tuesday that net debt had fallen in the first half. Net debt stood at £165m at the end of last year, compared with the group's current market cap of £120m. This implies impressive cash generation in the first half.
The company offers specialised industrial cleaning services for storage vessels, process pipelines and heat exchangers. It is also involved in waste handling and transportation, and hires scaffolding and temporary fencing, among other things.
Despite the amazing recovery of the shares since their lows, they are still only trading on a December 2009 earnings multiple of six. This falls to 5.8 in 2010 and just 4.9 in 2011.
The company said it was on track to meet full-year expectations, with a strong performance in the Middle East and positive currency movements. However, the Australian business continues to suffer, but this is expected to improve next year.
The Australian government has plans to increase its export capacity for liquefied natural gas (LNG) significantly over the next five years – and Cape is well placed to win contracts in the area.
The company is also more exposed to maintenance spend, as opposed to discretionary capital expenditure, which is where project cancellations are happening.
Cape also keeps winning contracts, as represented by a recent raft of deals in Qatar.
The company does not pay a dividend. However, with revenue visibility improving and the company continuing to win new contracts and positive moves on the debt position, the shares remain a buy.