India’s demonetisation of large currency notes, an anti-corruption move that began in November 2016, has been widely labeled as negative for the economy in the short term. Schroders, for example, was one of several firms that expressed this view.
The 500 and 1,000 rupee currency notes, which account for 86% of circulation, were declared illegal in a fortnight on November 8 last year.
But Sambhshivan said he sees a different story from data that came out in December and January, which wasn’t as bad as people expected.
“The impact of demonetisation is more on the informal sector,” he told FSA.
The informal sector he defines as registered and licensed small and medium-sized companies, or unlisted companies, that do not disclose books of accounts and typically don’t pay taxes. It is opposed to the formal sector which includes big, publicly listed, branded companies that pay taxes.
In India, many informal sector companies sit in parts of the distribution chain and their business involves a lot of cash dealings. These companies were heavily impacted, he explained.
Shift to formal
Many informal sector companies are in the consumer consumption category, which accounts for about one-third of India’s GDP. They are also in manufacturing and export. These business sectors will likely suffer the most from the currency note ban.
However, “in the consumption sector, as it faces the demonetisation and also the to-be-implemented goods and services tax (GST) reform, market share has been shifting from the informal players to formal ones”.
The “formalisation of the economy” is also a focus of Sambhshivan’s portfolio.
Some listed companies have already reported better-than-expected results, with share prices rebounding to pre-demonetisation levels, he added.
The fund holds 32% in financials, and about 24% in consumer discretionary and consumer staples. It has only 4% in IT names, versus 15.5% in the benchmark MSCI India 10-40 Index.
Sambhshivan is cautious on the IT sector. “They have been struggling for top-line growth now for the last few years,” he said.
The Indian rupee has fallen nearly 22% since 2013, but the IT services sector has faced lower margins during the period due to lower pricing power.
However, the outlook for India seems to be improving. Others firms, such as Emerise and Mirae, expect that tax reform will lower the tax rates for a number of sectors, reduce retail prices and boost household consumption.
The fund’s three-year performance versus its benchmark, the MSCI India 10/40 Index, and FE’s category average of India equity funds available for sale in Hong Kong.
Source: FE. All fund NAVs in this performance chart have been converted to US dollars.
Sambhshivan has performed better than the peer group composite over the last 10 years.
“Over a long track record, the manager has, period by period, consistently managed to outperform the peer group. Good stockpicking has had a material positive impact on results, which have tended to be relatively better in a rising market,” according to FE.
