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Aberdeen India Opportunities Fund Annual report to 30 September 2014

Performance Review The Aberdeen India Opportunities Fund rose by 41.16% in Singapore dollar terms for the year under review, outperforming the benchmark MSCI India Index’s 39.86% gain.

Market Review Indian equities climbed over the year in review, largely on the back of election-related optimism. Initially, investors remained subdued as they fixated on the US Federal Reserve’s monetary policy plans. The Reserve Bank of India’s two interest rate hikes did not help. Meanwhile, a rout in some emerging market currencies in the first quarter of 2014 cast a pall over the broader asset class for a period. However, speculation that a leadership change was imminent sparked an enthusiasm for Indian stocks that swiftly turned euphoric following the landslide election victory of the business- friendly Bharatiya Janata Party (BJP), led by Narendra Modi. The hope is that he will usher in a new investment cycle and overhaul the country’s crucial yet dismal infrastructure. This waned toward the end of the period as investors remembered there is no quick-fix for India’s structural woes. Focus also shifted back to the global arena, as escalating tensions in the Middle East and the prospect of higher US interest rates tested nerves. Against that, however, signs that the Indian economy might be on the road to recovery provided some support.

Portfolio Review Not holding energy stocks was a key contributor to relative returns. Reliance Industries came under pressure, particularly when the government deferred plans to hike gas prices. It is this kind of regulatory uncertainty that makes us wary of the sector. Meanwhile, the election-related euphoria that drove equities to new heights especially favoured cyclical stocks, on hopes of a revival in infrastructure spending. As such, our overweight to cement stocks aided relative performance, as did our non-benchmark exposure to industrial firm Container Corp of India. Our holding ABB India, a power and automation equipment supplier, also proved advantageous.

At the stock level, ICICI Bank outperformed, rebounding from prior weakness on the back of improving margins and cost controls, while Bosch benefited from the sharp gain in auto component stocks on expectations of a pick-up in consumer demand and industrial growth. Gujarat Gas was another top contributor, on the back of reports that it would merge with Gujarat State Petroleum Corporation, while drugmaker Lupin gained following excellent fiscal first-quarter earnings and new partnerships that should extend its global reach. The government’s decision to scrap plans for price controls on a range of branded generic drugs made by Western multinationals and leading domestic manufacturers further buoyed healthcare stocks.

Conversely, our overweight to consumer staples was a notable detractor as the sector struggled throughout much of the period amid lacklustre demand and heightened competition. Against this backdrop, our holdings Nestle India and Godrej Consumer Products detracted from performance. However, the sector has recently enjoyed a rebound as sentiment turned upbeat on an improved demand outlook. Mphasis detracted as its parent, Hewlett-Packard, continued to wean the firm from depending on its business and encouraged it to further diversify its customer base. We see this as a transition phase and feel reassured by Mphasis’ success in winning new clients.

In portfolio activity, we benefited from GlaxoSmithKline’s offer to increase its stake in subsidiary GlaxoSmithKline India to the maximum permitted 75%. The tender was priced at a premium and we believe it reflects both GSK India’s solid fundamentals and the attraction of India’s increasingly affluent consumer base. We maintain a reduced position in GSK India. We also initiated Kotak Mahindra Bank. Its team has managed business cycles well. It has consistently avoided major financial pitfalls, while maintaining one of the sector’s highest rates of asset and loan growth over the last decade.

Source: Aberdeen Asset Management Asia Limited The performance returns are sourced from Lipper, based on percentage growth, calculated on a NAV-to-NAV basis with gross income reinvested.

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