Rural India will profit from rising inflation, says top rated manager

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India has a huge tasks ahead of it in order to overcome a disappointing year and put its equity market back on the right track, according to Schroders' Manish Bhatia.

The Citywire A-rated manager, who runs the Schroder ISF Indian Equity fund, said the country would even need to undergo a well-coordinated slowdown in growth in order to improve its long-term sustainability.

‘Overall, a lot went wrong in India last year. Inflation and interest rates soared, corruption scandals rocked the corporate sector and the government failed to make key policy decisions,’ he said.

‘The good news for investors is that 2011 is over, and there is a lot of scope for improvement in 2012. However, it will not happen overnight.  As a result, we are likely to endure more blips in market performance over the coming months.’

Discussing how India could improve performance, Bhatia said the country would need to cut interest rates but does not expect this to happen until the second half of 2012. Perhaps more importantly, Bhatia said, GDP growth needs to be slowed and stabilised.

‘As this scenario unfolds the government will have to reverse policy to kick-start investment and consumption. This will mean restarting stalled infrastructure initiatives: building roads and power plants, firming up policies on fuel, water etc.’

‘At this point, we’ll see the investment sector picking up and consumption will start to come back,’ he said.

Rural consumers

Bhatia said he is moving his investments away from the broader consumer sector due to expensive valuations.

Instead, the Schroders manager said he is looking specifically at rural consumers, who are seeing their incomes increase by virtue of government money transfer schemes, commodity inflation and agricultural schemes.

‘This area of the market is, therefore, likely to see the most consumption growth going forward. Rural communities are increasingly aspirational, and looking to buy such things as electronic items, including TVs, in large numbers,’ he said.

Other areas Bhatia expects to prosper are pharmaceuticals, which will benefit from Western governments looking to cut costs, and IT services, which will similarly benefit from other governments reducing expenditure.

In contrast, Bhatia expects the overly-competitive telecommunications and the over-leveraged corporate debt sectors to struggle over the coming year.

Over the past three years, the Schroder ISF Indian Equity fund has returned 121.86%. This is while its benchmark, the Bombay Stock Exchange 100 Index, has risen 115.36%.