The Shanghai Composite has continued its plunge from the June high of 5,166 points down to a 31 August close of 3,165 – a drop of 38.73% in less than three months.
With everything that has already happened and more sideswipes due in the form of policy changes from various central banks, Asian equity specialists have been left scratching their heads as to how much farther the rout can run.
However, Swan, BlackRock’s head of Asian equities, said that despite investor reticence over emerging markets in general, the Indian growth story remains a compelling one.
“Asian equities as a whole is below 1.3x price-to-book, and India has been our favoured region, and, barring a change in the global financial market view, will continue to be,” he explained.
“India is still a diverse market, and our preference is towards domestically focused companies that will benefit from the economic cycle. Around 40% of profits in the India index are generated in US dollars outside of India, therefore we do not want to just buy the index. We like financial services, and some areas of the consumer and industrial sectors.”
This conviction is represented in Swan’s BGF Asian Dragon Fund by a 6.2% India overweight, alongside 32.1% and 5.6% in financial services and consumer discretionary respectively.
But in spite of the healthy economic outlook surrounding Narendra Modi’s reforms, Swan is cognisant of the impact that shifts in global investor sentiment could have on what he believes is currently the most promising Asian market.
“It depends on how controlled global fund flows are in terms of investors seeking safe havens,” he said. “If flows are controlled and orderly then India is looking very strong.
“Economic momentum is moving in the right direction and Indian equities are compelling on both an absolute and relative basis. India has favourable demographics, no debt problem, and, due to being more orientated towards the US, it does not rely on China for exports.
“However, the risk to that positive view is some sort of disorder or stress in the global financial system – in that environment India would not be spared. There are times when the environment moves from being just a downturn to a crisis, and it is difficult to know right now which one this is. It is subject to the policy decisions on the horizon – Fed rate rises and the implications of that, and the whether Chinese policy is of a more fiscal and monetary nature or more around structural reforms.”