Liontrust India Fund

• Despite a late sell-off, India delivered a strong annual return, outperforming many emerging markets. The US economy's strength was a key external factor, attracting capital and delaying expected global interest rate cuts.
• The lion's share of the outperformance came from stock selection, particularly in the financials and IT sectors. In financials, capital markets infrastructure operator KFin Tech was a standout.
• India remains one of the most attractive structural growth stories within emerging markets and, to a much larger degree than most, insulated from external macro shocks.

Over the quarter, the Liontrust India Fund returned 2.2%*, versus the MSCI India Index return of -5.0% and the 0.4% average return in the IA India sector (both of which are comparator benchmarks).

The final quarter of 2024 saw emerging markets in general suffer a notable sell-off, giving back some of the gains that until this point had seen the asset class enjoy a solid year of performance. Emerging markets fell 8.2% in US dollar terms, significantly underperforming developed markets, which were largely flat (-0.4%). India was no exception to this, falling 10.8%. Despite the late sell-off, India remained one of the better performing emerging markets over the year as a whole, with a positive return of 11.2% (in US dollars). The most significant external factor weighing on performance was the continued outperformance of the US economy, not only creating a growth divergence attracting money to the United States, but also preventing the much-anticipated reduction in global interest rates priced in earlier in the year. Indeed, the US 10-year Treasury yield, having fallen back to near 3.5% late in the third quarter in expectation of the Federal Reserve cutting rates imminently, rose rapidly to close the year above 4.5% due to a robust US jobs market and higher-than-expected inflation. This backdrop also saw a marked rise in the US dollar against global currencies – especially those in emerging markets, which historically creates a difficult backdrop for the asset class. So too in India were hopes for easing monetary policy disappointed, with no rate cut coming in 2024 and still-elevated food inflation threatening prospects for a rapid sequence of cuts in 2025.

The Indian economy has seen several notable disruptions in 2024, notably the hiatus caused by the vast scale of the general election, held during the summer months. However, major weather events also took their toll, with extremely hot weather in the year followed by extended rains later in the year. The combination of these factors saw something of an easing in economic data and corporate earnings in the final quarter of the year. Having exited 2023 at an impressive rate of 8.6% real growth, the economy registered 5.4% for the third quarter. This relative reduction in growth rates has to some extent been a function of slower government investment, driven in part by general election disruption, but also by a political pivot by the ruling BJP to focus on increased revenue spending – in the shape of increased handouts – and a moderating of investment spending. The Union Budget in February will be closely watched to gauge the policy priorities of Modi's third term in office.

From a sector point of view, power utilities' performance slowed somewhat post-election, as order flow remained muted. Consumer discretionary stocks continued to trade well given robust consumption in the higher income segments, while consumer staples companies continued to struggle given ongoing weakness in rural income growth as well as inflationary pressures disproportionately impacting lower-income rural consumers. In the financials sector, performance was mixed given some asset quality pressures in the non-bank financial sector, where again lower-income borrowers showed some incremental signs of stress. The two strongest areas were IT services and healthcare, key beneficiaries of the rupee weakening against the US dollar, with many companies in these sectors earnings significant proportions of their revenue in dollars.

The Liontrust India Fund enjoyed a strong quarter of returns, delivering 2.2% (sterling terms) against an index return of -5.0%. The lion's share of the outperformance came from stock selection, particularly in the financials and IT sectors. In financials, capital markets infrastructure operator KFin Tech was a standout, benefiting from both the strength of domestic financial markets as well as expansion into international markets, especially in South-East Asia. PB Fintech was another strongly performing holding, with growth momentum unabated. Operating the dominant insurance online platform, Policy Bazaar, PB has grown its share in new retail health insurance to 20% from 6% at the time of its IPO in 2021. The Fund's low exposure to smaller banks, non-banking financial companies (NBFCs) and micro-finance institutions also allowed it to avoid many of the asset-quality issues that bedevilled the sector over the quarter. In IT services, holdings in Persistent Systems and Newgen Software – both mid-caps – out-performed larger peers.

There was a mild drag on performance from the capital goods sector. Exposure here had been reduced through the past two quarters, and power infrastructure players such as Thermax and Siemens saw weaker performance in the final quarter.

The Fund finished the year with a return of 17.3% against an index return of 13.2% and sits in the top quartile of the peer group over 5 years.

India remains one of the most attractive structural growth stories within emerging markets and, to a much larger degree than most, insulated from external macro shocks – including potential tariffs from a second Trump presidency. India is expected to become the third largest economy in the world in 2027 and its vast scale provides a unique opportunity to diversify supply chains away from China and operate at a significant-enough scale to serve global export markets, as demonstrated by a string of global tech hardware companies setting up production in India in recent years. That said, the exit rate of growth in India at the close of the year was somewhat subdued, and markets will be keenly watching the following quarter's corporate earnings and economic data to gain confidence that growth is picking up again. Key events to watch will be the Union Budget and monetary policy meeting of the Reserve Bank of India in close proximity at the start of February.

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

*Source: FE Analytics, as at 31.12.24, 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.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term. 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.

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