Indian equities have soared ever since the new government, led by Prime Minister Narendra Modi, came into power with a clear mandate, which global investors believe will help him drive vital reform initiatives.
“Momentum has been based on hope for reform, rather than on reality," said Robert Horrocks, chief investment officer and portfolio manager Matthews Asia.
"The government will have to continue to convince people with its rhetoric that it can deliver on actual reforms. While I cannot forecast this, I acknowledge the risk that the market could be vulnerable to disappointment."
According to Horrocks, some of the key reforms such as upgrading infrastructure and liberalising the labour market are not easy to implement.
“India is not straightforward. Attempted reforms are typically met with resistance and it will not likely be smooth sailing.”
Global investors have been expecting a series of reforms from the new government including opening up the Indian economy for foreign direct investments, implementation of the goods and sales tax act and boosting the manufacturing sector, among others.
Horrocks views on India differs from other managers. Andrew Swan, head of Asian equities at BlackRock, recently said India remains his most favored market. Swan sees the implementation of the goods and sales tax itself adding 2% to the economic growth. The plunge in the price of oil also benefits the government budget.
Horrocks, however, said the possibility that India will achieve Chinese-like growth rates is “beguiling”.
“That would lift hundreds of millions out of poverty and into more middle-class lifestyles, and would be an enormous opportunity for the kind of companies we favor. But, our hope for the future always needs to be tempered by reality.”
Earlier in October, speaking at a Last Word Media event, Sunil Asnani, portfolio manager at Matthews Asia, said investment opportunities in India are not limited to reform-linked themes.
He finds businesses that have pricing power created through product innovations or value-added work, factors that are not strongly correlated with reform progress.
A look at the one-year performance of Matthews Asia India Fund compared to its benchmark:
The run-up in key Indian indices over the last one year: