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Markets: India for the long term

7 April 2021

Is recovering India still the place to be for long-term growth? There are plenty of opportunities to be had, especially for the investor with a longer time horizon, says Darius McDermott, managing director, FundCalibre

Economic reforms and an evolving economy have made India the apple of many an investors’ eye as they’ve searched for growth in the past few years. However, like the English cricket teams’ recent tour to the country, investors have had to take the rough with the smooth.

Make no mistake about it, the short and long-term trends are heavily in favour of the country. Earlier this year, the International Monetary Fund, projected growth of 11% for the country in 2021, double what is expected on a global scale*.

But the past couple of years have been challenging. 2019 saw election uncertainty and a cyclical slowdown in the domestic economy, as a liquidity shortage – caused by a crisis in the shadow banking sector – hit economic growth. Last year was also difficult, with India not being lauded for its management of Covid to the same degree as its peers in Northern Asia.

Performance-wise, over the last three years, the MSCI India has risen 20.7% compared with 32.9% for the MSCI World – although the country has still marginally outperformed the wider emerging markets region during that period**.

While most countries suffered as a result of Covid disrupted supply chains, with many enforcing trade restrictions across regions, a research note from Fidelity says that India had the domestic demand to sustain growth – with private consumption driving 60% of the economy***.

And under the stable governance of pro-business prime minister Narendra Modi and the ruling Bharatiya Janata Party, India has also been embarking on a range of structural and economic reforms – such as the Goods & Services tax. A number of reforms have taken place post pandemic, like the Make In India 2.0 initiative – these are designed to create 100 million manufacturing jobs (increasing the sector’s contribution to GDP to 25% by 2025), with infrastructure spending set to double in the next five years***. Other reforms also worth noting include the deregulation and nationalisation of labour laws and changes to farming laws in certain areas.

The manufacturing reforms highlight a key point –  India’s economy is modernising. Goldman Sachs India Equity Portfolio manager Mithran Sudhir says last year was a watershed moment for India, where it went from a consumer electronics net importer to having a small net export, demonstrating the domestic manufacturing capability is coming through. He says India is offering these capabilities at a time when many tech firms are looking to diversify their products out of the likes of China, which could be a major boon for the country.

Matthews Asia portfolio manager Peeyush Mittal says India is also becoming increasingly dynamic in the likes of digital communications and online platforms – with rapid adoption of services and content allowing digitally native platform and businesses to be self-funded, rather than depending on external capital^.

We have yet to even touch on the long-term structural trends boosting the region. More than 50% of the population is under 25 years of age^^, while forecasts suggest India will have added 200 million people to its workforce by 2050 and will surpass China’s population in five years***. I even learned recently that the 10 fastest growing cities in the world (in terms of GDP) between 2018 and 2035 will be in India, much of which will be courtesy of the spending power of the burgeoning middle-class***.

Schroder Adveq head of investments Asia, Viswanathan Parameswar, points to the four “M’s” which underpin a brighter future in Asia through its consumers: (millennial, middle-class, metropolitan and mobile-enabled) all of which have India at the epicentre of this growth. The fact the pandemic has spurred a digital transformation to make India digital-first, is a major change occurring at record speed, and is set to offer significant growth for the region.

The only negative is valuations appear slightly expensive, although if you adjust for the lower cost of capital, they might be slightly cheaper when compared to the last 10-12 years^. Ultimately, India is a maturing market with some 5,000 listed companies, an eager consumer ready to tap into the likes of the retail, automotive and financial sectors, all of which lag behind the US and China from a penetration perspective. Add the digital transformation into the mix and India looks an exceptionally attractive long-term investment.

Those looking to invest may like Goldman Sachs India Equity Portfolio as a pure play, while a wider Asia fund with real conviction in Indian stocks is Stewart Investors Asia Pacific Leaders Sustainability with its 37% ^^^ weighting to the country.  The likes of the Matthews Pacific Tiger (13%)^^^ and Schroder Asia Alpha Plus (11%)^^^ offer reasonable exposures through a more diversified offering.

*Source: IMF: World Economic Outlook – January 2021

**Source: FE fundinfo, total returns in sterling, 26 February 2018 to 26 February 2021

***Source: Fidelity – The Case for Investing in India

^Source: Matthews Asia – India Tilts Towards Earnings Recovery

^^Source: www.livemint.com – India’s burgeoning youth are the world’s future

^^^Source: fund factsheet, 31 January 2021

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.

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