Liontrust India Fund

• India’s domestic recovery continues, with economic growth accelerating to 7.4%, while falling inflation has allowed rate cuts.
• The Indian consumer is supported not only by interest rate reductions, but also fiscal policy including tax cuts and target cash transfers.
• The Fund has been positioned for incipient consumer recovery and recovering credit growth.

Over the quarter, the Liontrust India Fund returned -0.8%*, compared with the MSCI India Index return of 2.9% and the 2.7% average return in the IA India sector (both of which are comparator benchmarks).

The quarter of 2025 began dramatically, with the unexpectedly significant tariff announcements from Donald Trump on 2 April, so-called Liberation Day. The executive order declared a 10% baseline tariff on virtually all imports effective 5 April, with additional country-specific ‘reciprocal’ tariffs, ranging from 11% - 50%, from 9 April based on bilateral trade deficits. Markets initially sold off dramatically, though as weeks and months progressed, many measures were significantly watered down or postponed, leading to a broad-based recovery in markets throughout the quarter.

For the second quarter as a whole, global equity market returns were remarkably consistent, with emerging markets, developed markets and the S&P 500 all returning roughly 11% in US dollar terms. Against this backdrop, India returned a healthy 9.9% − having initially proven itself much more resilient to tariff-induced volatility, India subsequently lagged the sharp relief rally. Both the initial outperformance and subsequent underperformance reflect the reality that India remains one of the least affected markets due to its domestically driven economy and heavy weighting of domestic sectors and earnings in equity indices. 

Domestic recovery continues, while falling inflation has allowed rate cuts

Even if it was slightly less exciting than the surge in relief surrounding Donald Trump’s tariff postponements, India’s domestic recovery nonetheless continued apace. Having seen a pullback in growth in the past six to nine months due to the hiatus of the country-wide general election last summer, GDP growth has staged an ongoing acceleration, with the Jan-Mar quarter recording 7.4% year-on-year growth, a sharp improvement on much weaker numbers in previous quarters. Moreover, inflation continued to fall, with CPI dropping sharply to a 6.5-year low of 2.1% in June, well below the central bank’s 4% target. An easing in food prices has been particularly helpful in bringing down broader inflation; food inflation turned negative in June. 

This benign backdrop had allowed the RBI to cut policy rates by 0.25% in both February and April, before surprising the market with a 0.5% cut in June. Just as importantly, the central bank has sought to improve liquidity conditions in the banking system – which have been extremely tight – feeding through into a significant slowdown in bank credit growth to the economy. In June, the RBI surprised the market with a 0.5% cut, combined with a reduction in the amount banks must retain as reserves with the central bank. The swift and aggressive action seemingly amounted to a tacit admission that conditions have been too tight, and the RBI has thus moved to reverse this in a clear sign of support to economic growth.

Indian consumer supported by interest rate reductions, tax cuts and target cash transfers

The combination of reduced inflation and interest rates has a clearly positive impact on the Indian consumer. Whilst the first two terms of the Modi/BJP government were focussed squarely on delivering crucial infrastructure investment, the February budget this year marked a clear turning point in its support for domestic consumption, offering a tax cut as well as other targeted cash transfers. In addition, the Central Pay Commission – a body set up roughly every decade to revise salaries, allowances and pensions of central government employees – is set to announce upward revisions that could see up to 30-35% increases in pay and pensions for roughly 11 million beneficiaries, a clear further boon to consumption. The combination of tax cuts, cash transfers and pay hikes translate to around 2% of GDP in consumer stimulus.

Portfolio positioned for consumer recovery and credit growth

The Fund has continued to increase exposure to this incipient consumer recovery in a number of ways. Firstly, through increased weights in existing holdings in consumer discretionary stocks such as TVS Motor and Eicher Motors – both dominant in premium two-wheeler autos – as well as in Eternal, the dominant player in both food delivery (Zomato) and quick commerce (Blinkit). Eternal's share price came under some pressure earlier this year due to the broader macro slowdown as well as its aggressive investment plans deferring profitability by a few quarters. However, the stock has begun to recover well on the back of robust user numbers and an easing of pressure from competitor Zepto, whose aggressive recent discounting eased. Indeed, a position in Swiggy –  the second player in the sector – was also added, with both players benefiting from similar trends of improving consumer health and Zepto's reduced threat.

Secondly, the portfolio is well positioned with respect to recovering credit growth, both through traditional banks and non-bank lenders. So-called NBFCs offer banking-like services and are regulated by the RBI but are not in fact banks – they play a critical role in delivering credit, financial inclusion and financing underserved sectors, especially in the SME sector, rural areas and with informal borrowers. Across the sector we are seeing improved financial health, a turnaround in asset quality and rising profitability with greater liquidity to the sector and lower cost of borrowing. Positions in Shriram Finance and Chola Investment & Finance offer exposure to auto loans, whilst IIFL Finance and Bajaj Finance operate broadly across SMEs, consumer lending and household loans. Finally, the Fund remains overweight in the real estate sector, where lower interest rates are set to ease affordability constraints for buyers. Holdings in Godrej Properties and Prestige Estates are primarily focussed on the mid-to-premium residential segment, where the impact of consumer stimulus will be felt most keenly, as opposed to the luxury segment, which has already seen extremely strong growth and is unlikely to see as much incremental improvement.

The primary driver for the Fund’s underperformance in the quarter was ongoing weaker performance of some of the portfolio’s mid-cap holdings. Although the wider dynamic in the Indian economy continues to suggest an ongoing reorientation away from infrastructure as the sole investment priority, and towards a more balanced approach that incrementally benefits the consumer, the sharp revival of government capital expenditure spending in the quarter saw many industrial sector companies rally significantly (from low levels) and the Fund’s lower weightings towards this and adjacent sectors proved costly. Nonetheless, in the final month of the quarter, performance stabilised as the Fund’s exposure to the expected consumer recovery and also lower interest rates began to play out.

Having seen an easing in relative performance in the market since its recent peak in September last year, which exactly tracks the moderating economic momentum in the economy, Indian equities are now responding well to the renewed pick-up in activity. We continue to believe that India represents one of the most compelling long-term investment opportunities due to its secular domestic growth story and increased insulation from the wider global economy.

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

*Source: FE Analytics, as at 30.06.25, primary share class, total return, net of fees and income reinvested.