EM boutique founder: why India is the contrarian bet for 2014

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The difficulties which hit India in 2013 have created buying opportunities and scared off ‘fickle’ fixed income investors, according to EM expert Matt Linsey.

In his latest investor note, Linsey, who runs the GAM Star North of South EM Equity fund, said India is the market he is most positive on for the coming year.

‘The 25% correction in the rupee by August this year has created opportunities – especially since India boasts a number of companies with foreign earnings,’ Linsey said.

Linsey said the influx of foreign investors had caused problems for the so-called ‘fragile five’, with Turkey, South Africa and Indonesia particularly hard hit when investors removed their money.

He said: ‘Developed market investors faced with negligible interest rates at home, had been pouring money into higher-yielding emerging market local currency bonds.’

‘This artificially supported the currencies and created an illusion of sustainable fixed income returns and attracted more money.'

‘Foreigners are barely present in the domestic debt market and net external debt is below 10% of GDP. This means India is far less dependent on fickle fixed income investors.’

Noted EM investors such as Sanlam’s Kokkie Kooyman and Aberdeen’s Hugh Young have been highly critical of the Indian market over the course of 2013. 

Drivers of performance

Taking into account the domestic debt dynamic, the appointment of Raghuram Rajan as governor of the Reserve Bank of India and move to address the cost of energy will prove powerful drivers of performance, Linsey said.

The efforts to reform energy subsidies which exacerbated the current account deficit has seen Linsey begin to position his €105 million more greatly towards India’s oil and gas sector.

‘There is now a realisation that this is not sustainable and the government is slowly moving to address the problem. Upcoming national elections could further accelerate the process.’

‘We have bought some of the large Indian oil companies that currently suffer from the subsidy regime, as well as exporters that benefit from a more realistic currency valuation.’

India currently makes up 4.9% of the fund’s geographic exposure, while Korea (14.4%) and Taiwan (14.3%) are the two largest exposures.

Linsey is the founder of global emerging markets boutique North of South Capital. He has run the GAM Star North of South EM Equity fund on mandate since its launch in August 2011.

The GAM North of South fund returned 13.3% over the 12 months to the end of November 2013. This compares to a rise of 6.9% by its Citywire benchmark, the MSCI EM (Emerging Markets) TR USD, over the same period.