Despite recent emerging market struggles, there are plenty of reasons to invest in India
Of all the emerging market economies, China usually garners the most attention. And with China often hogging the limelight, India can be the neglected cousin.
Yet, there are plenty of reasons for investors to get excited about this developing nation, particularly as Chinese growth slows down.
Admittedly, the burgeoning trade war with the US creates a challenging environment for emerging markets as a whole. But while it would be unwise to ignore the indirect consequences of this, India’s domestically driven economy means that it is less threatened by protectionist policies.
India’s total exposure to the US market as a share of GDP is at just three per cent on a gross basis, or $77bn, according to Simon Finch, co-manager of the Ashburton Chindia Equity Fund. Finch says it’s unlikely that President Donald Trump will turn his attention to the country.
Even with the recent market volatility, there are plenty of positive drivers that are fuelling India’s long-term potential, making it look like a buy and hold opportunity.
First, reforms are bringing a new-found confidence to Indian companies.
“The economic reforms adopted in the last few years have borne fruit for India, and it is now expected to become the fastest growing economy in the world by 2025, with a GDP forecast of $5 trillion,” says Kerim Derhalli, chief executive of Invstr, an investment platform which recently partnered with Indian Brokerage SIC stocks to launch real-trading services for Indian markets.
“Everything considered, there has never been a better time to invest in Indian markets.”
Many of these reforms have been pushed through by business-friendly Prime Minister Narendra Modi, who is expected to win another election next year.
“Modi is relentlessly trotting the globe promoting foreign direct investment,” says Jason Hollands, managing director at Tilney. “Meanwhile at home, India has been implementing structural reforms, including the introduction of a goods and service tax, which replaced a complicated patchwork of different taxes across India’s regional states.”
China may well be the most populated country on earth, but its population is set to decline quite rapidly as a result of tumbling birth rates
There have also been efforts to modernise the country. One example is the implementation of the world’s largest biometric identification system. Despite concerns about the identification programme (known as Aadhaar), the scheme is paving the way for millions of disadvantaged people to be included in the formal banking system for the first time.
There have also been efforts to improve corporate governance standards and levels of disclosure among Indian companies.
But it’s not just the reforms and the strength of the government that make India look promising.
The country’s young demographics are a big benefit from a business and investment point of view. The median age in India is just 27 years old – compared to 40 in the UK. By 2025, India is expected to have the largest workforce in the world.
“China may well be the most populated country on earth, but its population is set to decline quite rapidly as a result of tumbling birth rates, and it is already seeing a contraction in its workforce,” Hollands explains. “In fact, there are eerie parallels with where Japan stood a couple of decades ago.”
He points to the growing number of highly educated citizens, who are part of the country’s rapidly expanding middle class. “Many speak English – the language of international business.”
India’s ambitious and aspiring population of educated, increasingly affluent, and technically savvy people means that there are plenty of opportunities to sell financial products
So where should you be looking in terms of investment?
Derhalli reckons investors should be considering the thriving private sector banks, which tend to focus on consumer financing.
He points out that there are about two dozen of these banks in India, from old incumbents like City Union Bank and Karnataka Bank, to more recent disruptors, such as Yes Bank, Axis, HDFC, IndusInd, IDFC, and Kotak Mahindra Banks.
“India’s ambitious and aspiring population of educated, increasingly affluent, and technically savvy people means that there are plenty of opportunities to sell financial products.”
Alternatively, you might prefer to invest in India through a specialist fund.
Hollands says investors could consider the Jupiter India fund (which has returned 147 per cent over five years, against 32 per cent for the IA Specialist sector). You could also consider the lesser known Alquity Indian Subcontinent fund, which provides exposure to SME businesses.
Or, if you want to take a broader approach, invest in a emerging markets fund that has a heavy weighting towards India.
Hollands recommends the Stewart Investors Asia Pacific Leaders fund, which has major positions in the likes of Tata Consultancy Services, Mahindra & Mahindra, and Tech Mahindra.
Another fund with a big India weighting is the JP Morgan Emerging Markets Investment Trust, which holds stocks like IndusInd Bank, Tata, and the Housing Development Finance Corporation.
“For investors who missed out on the strong rise for Indian equities in 2017, the volatility we have witnessed recently could provide an attractive entry point to a market we still believe offers strong potential over the medium to long term,” adds Finch.
So with its positive demographics, stable government, and ongoing reform agenda, India is an economy that investors can’t afford to ignore.