Liontrust India Fund

• Indian equities underperformed the wider emerging markets index due to China’s extraordinary late-September rally, but outperformed developed markets. Year-to-date, India remains among the best performing global markets. 
• The recent general election result has seen an incremental shift in emphasis away from the ongoing infrastructure program towards more consumer-friendly policies. 
• The policy shift saw a market rotation, with industrials losing ground and the best performing sectors being largely those with defensive characteristics. This trend led the Fund to give back some of its strong recent relative performance. 

Over the quarter, the Liontrust India Fund returned -3.4%, versus the MSCI India Index return of 1.1% and the 0.7% average return in the IA India sector (both of which are comparator benchmarks)*.

The third quarter saw Indian stock markets continue to rally, returning 7% in US dollar terms, taking year-to-date returns to 25%, among the best performing global markets. Given the strength of the pound, sterling-based returns for the quarter were 1.1% for Q3 and 19.2% year-to-date. Over the quarter, India mildly underperformed wider emerging markets − primarily due to the extraordinary rally in Chinese markets seen at the end September. However, Indian markets nonetheless produced better returns than developed markets over the period.

The backdrop for broader emerging markets has been steadily improving this year, with the post-Covid inflationary spike easing, in turn enabling global central banks to begin an easing cycle. The US Federal Reserve initiated its own rate-cutting cycle in September by reducing its target rate by 50 basis points − the biggest increment since 2008 (outside of the emergency Covid response). This in turn has created leeway for emerging market central banks to cut rates, India's among them.

At its most recent meeting, the Reserve Bank of India (RBI) altered its monetary policy to "neutral" from "withdrawal of accommodation", which has been in place throughout this year in order to keep inflation in check. The RBI is expected to begin cutting the policy rate towards the end of this year, though some remaining inflationary pressures − especially in vegetable prices − persist, exacerbated by unseasonally heavy rains. The heavy rains have also seen a somewhat subdued quarter of economic activity (if only by India's own extremely robust recent standards).

The quarter was in many ways one where the implications of the recent general election (June) were processed. The reduced majority for the BJP-led National Democratic Alliance (NDA) has seen an incremental shift in emphasis away from the ongoing infrastructure program towards more consumer-friendly policies. Important upcoming state elections have seen a pickup in cash transfers in order to appease rural voters whose reluctance to vote BJP in the election saw the BJP's absolute majority eradicated. The BJP was widely expected to lose the state election in Haryana but in fact managed to confound expectations and won the state at the end of the quarter. Attention now turns to the large and critically important state of Maharashtra, which goes to the polls in December.

The shift in policy tone saw something of a market rotation, with industrials the only sector with negative returns for the quarter, closely linked as it is to the fortunes of India's investment cycle. Indeed, the best performing sectors were largely those with defensive characteristics − in particular, IT services, which derives a majority of earnings offshore − or linked to the rural economy, such as consumer staples.

The Fund, having enjoyed extremely strong performance ahead of this quarter, gave some of this back over the three months. The Fund remains one of the best performing funds over the past 5 years, with a return of 106.9% against a market return of 96.8% and peer group return of 85.9%, placing it in the top quartile of peers. Over the past quarter the key drivers of performance were undoubtedly those related to the aforementioned sector rotation. Long-term Fund holdings such as Finolex Industries in the materials sector saw weak performance, while the underweight allocation to consumer staples companies weighed on returns. The pullback in the hitherto strongly performing industrials sector also contributed to muted Fund returns in the quarter.

In response to the altering macroeconomic picture, the Fund took profits in a number of construction-related industrials holdings with exposure to the rail and road sectors, where we see incrementally lower spending going forward. A position was reinitiated in our preferred large-cap pharmaceuticals stock, Sun Pharma, which remains well insulated from falling US drug prices thanks to its strong speciality portfolio and diversification away from reliance on the highly competitive generics market. A position was also added in auto manufacturer Mahindra & Mahindra, which has attractive exposure to the tractor market, which we believe is moving into an early recovery cycle soon. Moreover, Mahindra has been particularly successful in capturing the rapidly growing SUV market, allowing it to outgrow peers in this segment, and continues to have an impressive pipeline of new models in this segment that will drive earnings growth.

We retain an extremely positive long-term outlook on the Indian economy, which we expect to become the world's third-largest economy by 2027 thanks to high and resilient economic growth rates. We are further encouraged by the resilience of the Indian market to global shocks, with domestic investors matching foreign for importance. Indeed, while the dramatic rally in Chinese equities at the end of the quarter saw India mildly underperform over the period, the much-discussed foreign selling in order to re-allocate to the Chinese market has almost entirely been absorbed by domestic purchases, offering ongoing support to the market and dampening volatility considerably.

Discrete years' performance (%) to previous quarter-end:

*Source: FE Analytics, as at 30.09.24, primary share class, total return, net of fees and income reinvested.

KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. The Fund may encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Investments in emerging markets may involve a higher element of risk due to less well-regulated markets and political and economic instability. This may result in higher volatility and larger drops in the value of the fund over the short term. Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. ESG Risk: In reference to any component (where applicable) of a fund's investment process that uses external ESG data, there may be limitations to the availability, completeness or accuracy of ESG information from third-party providers, or inconsistencies in the consideration of ESG factors across different third party data providers, given the evolving nature of ESG. There is no guarantee that an absolute return will be generated over a three year time period or within another time period.

DISCLAIMER

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.