Should you invest in India? Inside the last major emerging market left standing

Shifting fortunes in emerging markets mean India is now standing out as more investable than the rest. 

 

The last two years have seemed like a new dawn for investors in India. The country elected reformist candidate Narendra Modi as its new Prime Minister in May last year and experts around the world cheered his plans for change. The stock market began rising in anticipation of his win and carried on afterwards. In the last two years, investments in India’s 50 largest companies, listed on the CNX Nifty 50 index, have risen 32 per cent. “It was Modi mania,” says Nathan Sweeney of Architas.

 

It was a great year for investments in India, not just because of stock market performance but also because of the positivity about the county. 

 

Investing moves in cycles, with yesterday’s losers rising to become today’s winners. There is a lot of optimism about India right now, with many experts tipping it as their country of most potential. Here are the reasons why.

 

In the last few years emerging markets have generally been poor performers investment-wise. The countries tipped as the future stars of the investment world – Brazil, Russia, India and China – were collectively known as the BRICs, and India is the only one that hasn’t totally flopped.

 

“The only one of the emerging markets that looks like it’s doing anything is India,” says Adrian Lowcock of Axa Wealth. This, he says, means India’s stock markets could benefit from a “last man standing” status, where people who want to invest in emerging markets choose India as the relatively better option.

 

China's main Shanghai Composite stock markets plunged 40 per cent in June and July after rising 160 per cent in just a year. Fund managers are now very cautious about investing in the market because of the large swings in share prices, and it will take a while before confidence returns.

 

Economically speaking, the country is slowing down and ordinary people have taken out a lot of debt, which is worrying.

 

Brazil has slipped into a recession which some experts predict will be long and deep. The country is reliant on oil exports, and with oil prices down, is struggling.

 

At the same time the government is embroiled in the worst political scandal in its history, with corruption charges pulling in dozens of politicians of all stripes. All of this has combined to pull the main stock market, the Bovespa, down 48 per cent over the last 12 months.

 

Russia is also suffering a sharp recession. It is among the fastest-contracting economies in the world. Oil prices, on which the economy is dependent, are still low, while economic sanctions imposed by the West in response to the Ukraine conflict are also taking their toll. Most fund managers have no desire to invest here and the RTS index of the 50 largest companies has fallen 58 per cent in one year.

 

Compared to the others, India is faring somewhat better. It is the second-most populated country in the world with 1.2bn people (just behind China’s 1.3bn).

 

It has a large cohort of highly educated youngsters, plenty of rich people willing to spend money on consumer goods, and the country is renowned for IT, engineering and support services.

 

India’s good points are similar to China’s. Now the trouble in other emerging markets and India’s relatively better economy is making people question whether India is the new China, says Architas’s Sweeney.

 

“If you look at some of the data, India’s GDP for example, it was higher than China’s in the second quarter. There is a divergence in their fortunes, with China foundering and India on the up,” he explains.

 

India’s economy is growing around 6-7 per cent per year. Although China’s official figures say it is growing around 7 per cent this year too, many economists think this is inflated and that growth is closer to 4 per cent.

 

India has disappointed investors in recent history, and its slow, bureaucratic and often baffling systems make it difficult for companies to flourish.

 

For example, taxes vary by region, so a company trying to do business around the country will come up against different systems of local laws. Red tape is everywhere and regulation makes doing business arduous. But the excitement around Modi’s win has been all about his intention to reform this.

 

Progress is likely to be deathly slow. “India has had the most ineffective government in terms of its powerful families interfering and dictating,” says David Coombs of Rathbones Unit Trust Management.

 

But the intent is there, and Modi’s reputation depends on whether he pulls off the reform he promised. In fairness, expectations of change were very lofty, and it was never going to happen overnight.

 

Investing in an Indian equity fund should be a long-term play, and investors should expect to wait years for it to really pay off. People hoping for short-term gains are probably hoping in vain. “The Indian government has laid down a foundation that may not effect immediate change, but is aimed to make the way for more sustainable and structurally sound growth,” explains Rajendra Nair of the JP Morgan Indian investment trust.

 

Active funds are the best choice. India’s stock markets are home to 5,000 different companies, far more than any other Asian market. This is down to a unique facet of Indian business culture: the lack of finance for small businesses.

 

It is very difficult for young companies to get hold of the capital they need to grow, so instead they list on the stock market and raise money from investors.

 

“In other countries a business would get a bank loan, but this is not the case in India,” says Sunil Asnani of Matthews Asia. “There is no private equity or venture capital.”

 

This means the quality of stocks varies tremendously so investors need to pick a specialist fund manager who can choose just a few of the best stocks. A market tracking investment such as an index fund or an exchange traded fund (ETF) is going to be spread across both good and poor quality companies – and there are many of the latter.