The long-term outlook for India remains promising, argues Darius McDermott, managing director, FundCalibre
As one of just a handful of markets to produce positive returns in the first seven months of this year, resiliency has been the order of the day for Indian equities*.
Like other parts of the world, it has had its challenges with inflation and supply chain disruption hitting hard. Yet, as a recent Deloitte report on the nation’s economy pointed out, the “domestic demand and the desire of global businesses to look for more resilient and cost-effective investment and export destinations, among other factors, will help India ride this tide of headwinds. The optimism about India’s economic recovery, although slightly bruised, remains intact**.”
There are numerous reasons why the economy has outperformed its peers. Not only has it been able to continue to deliver decent GDP growth, and a reasonable outlook, but we’re also seeing strong corporate profitability growth, with earnings coming in well ahead of expectations, generally up around 30-40 per cent since last year***.
Add in the long-term tailwinds like strong demographics, a stable government and strong corporate governance – and you can see why India has been a favourite among investors.
The main challenge has been around valuations – those positive characteristics have not gone unnoticed by savvy investors. Historically, Indian equities trade at a 40 per cent premium to other emerging markets, but by the end of April 2022 it was closer to 70 per cent.
While much of it is justified, there are other reasons for these lofty valuations. FSSA Global Emerging Markets Focus co-manager Naren Gorthy points to the rapid growth of the IPO market (600 or so in the past five years) many of which have high valuations with scope to correct. He also cites the rise of numerous consumer staples companies in India which have benefitted from the re-rating process and now have high valuations.
The other challenges are inflation and the oil price. The former is somewhat mitigated as India is expected to have a good harvest this year – the ability to feed itself takes the pressure off to some degree. As a major importer of oil, that is a greater concern, with the likes of Alquity Indian Subcontinent fund manager Mike Sell believing a price between $150-$175 a barrel would pose challenges to India; this again is offset to some degree by the central bank sitting on $600bn of cash reserves.
Aids to the India growth story
I recently read foreign investors had removed some $33bn from Indian shares since October 2021, a contributor to the curtain being brought down on India’s outperformance versus other emerging markets during Covid. However, it seems domestic investors are picking up the slack.
Over the past two years, individual depository equity accounts have gone up from around 33m to just under 100m accounts. Investors are saving on a monthly basis, with many taking out five or 10-year investment plans. In the second half of 2021 alone, more money was invested in Indian equities by domestic investors than was invested by foreign investors for the full seven years prior to that***.
Reforms by Prime Minister Nahindra Modi continue to catch the eye as well – these include the Goods and Services Tax and the Indian Bankruptcy code – all of which are designed to make the country more attractive from an investment perspective.
Another factor is the country is almost fully digitised now. As Jupiter India manager Avinash Vazirani points out, everyone has a bank account, and India is a leader in terms of Fintech. He says: “Over half a million jobs were created in the tech sector in India last year, and c.700,000 more are expected to be created this year. These kinds of jobs are generally well paid, and they allow people to spend more money on housing, cars etc.***”
In my view, India is as compelling an investment case as it’s ever been. It’s hard to argue against the long-term growth story when over half the population of a country is under 25 years of age, with 1m people entering the work force each month. Future GDP growth is in the safe hands of millions.
Funds to consider
The all-weather fund
Backed by a well-resourced and experienced team, the Goldman Sachs India Equity Portfolio targets businesses of all sizes when building a 70-90-stock portfolio. The team’s ability to meet companies in India differentiates it from many in its peer group.
Domestic Growth
Managed by the passionate Mike Sell, the Alquity Indian Subcontinent fund looks past the larger companies in the index and invests in firms lower down the market cap spectrum which other investors often overlook. The domestic angle will lead to weights in names with a focus on internal growth, such as financial services and household products.
Regional funds with an overweight to India
The FSSA Global Emerging Market Focus fund is a high conviction strategy of 40-45 large to medium sized companies, which currently has over a quarter of its allocation in Indian equities****, while the Aubrey Global Emerging Markets Opportunity fund has 36 per cent****.
Investing in India – Pros and Cons
Pros
- The world’s best demographics
- Strong, stable government and good corporate governance
- Growing online/digital presence
- Domestic demand-driven economy
Cons
- Inflation has led to supply chain disruptions – exacerbated by the war in Ukraine
- Rising oil prices could hit the economy
- Valuations are not cheap
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
*Source: FE fundinfo, total returns in sterling, 31 December 2021 to 3 August 2022
**Source: Deloitte Insights – India economic outlook, July 2022
***Source: Jupiter – Notes from the Investment Floor: the outlook looks bright for India – July 2022
****Source: Fund factsheet, 31 May 2022
