The outlier rejoins the pack

We have been writing for some time about the bottoming-out of the value factor which started in November 2020.

This trend has been observed globally and among the various markets of the Asia-Pacific region.

However, one market had been notably absent from the trend: India. Here, the performance of value names in our target universe continued on its multi-year downward trend even post-November.

The reason for this in our view has been the absence of the key factor that has driven out-performance of value elsewhere: fears over the resurgence of inflation.

In other markets, these fears have arisen from a combination of massive fiscal stimulus and a concerted progression towards the re-opening of economies. India however has fallen short on both counts. It has not seen the same levels of government relief – around 4.1% of GDP of above-the-line spending announced so far, compared with for example a US figure of around 27%. And re-opening sentiment had been quashed by the second wave of coronavirus cases that started in March.

The environment started to change in May however as the number of daily cases started to slow.

Value names have started to rebound, and more than 80% of the securities in our universe saw higher trading volumes versus the previous twelve months. It may be a sign that investors’ attention is finally turning towards this corner of the market after a long period of neglect.

If this trend sustains, the potential upside is large. In our relative value strategy’s target segment –holding companies – India trades at a very significant discount to the rest of Asia-Pacific (below).

Holding company universe ranked by average P/NAV