In Depth: Why India remains a global investor conundrum
13 November 2019
The Hindu festival of Diwali celebrates the victory of light over darkness and knowledge over ignorance. In that spirit, our team of writers takes a look at India's struggle to maintain and expand one of the world's best-known secular growth stories, and how the emerging giant is plotting its next growth path.
India has been one of the strongest growth stories over the last 50 years, with its economy having accelerated without any significant reversals over this entire time, according to data from World Bank Asia.
During the 1970s and 1980s, growth averaged 4.4%; this then increased to 5.5% between the 1990s and the 2000s and, over the last decade, GDP has averaged out at 7.1%.
India has been my preferred emerging market for the best part of a decade. Home to 1.37 billion people (twice the population of Europe), 27% of whom are under the age of 15, it's always been a young, entrepreneurial country."--Juliet Schooling Latter
This has been reflected in the performance of its stockmarket, with the MSCI India index up more than 671% since the start of 2001 according to FE - which is as far back as the data stretches.
As a point of comparison, the MSCI Emerging Markets and MSCI AC World indices have returned 464% and 205.2% over the same timeframe.
However, the Indian equity index is trailing the MSCI Emerging Markets index year-to-date, having achieved less than one-quarter of its overall gains with a return of just 1.7%.
The MSCI AC World index is up 16.3% over the same timeframe, while the remaining BRIC markets (Brazil, Russia and China) have also at least quadrupled India's performance, with respective total returns of 14.5%, 35.6% and 9.16%.
India has also come bottom of the pack in comparison to all of the aforementioned indices over the past three years.
Yet it is cited by many industry commentators as retaining one of the most attractive secular long-term growth stories available to investors.
Research from Mazars shows economic growth in India has been sluggish recently, however, with real GDP growth output falling from 7% last year to 5% this year.
A contracting composite PMI could also suggest further pressures ahead, according to the firm.
Venkatesh Sanjeevi, senior investment manager at Pictet Indian Equities, said: "With various indicators signalling a slowdown, the government and the central bank have the unenviable task of turning the economy around."
Does the Indian stockmarket's lacklustre performance present buying opportunities for the astute investor, or will the economic challenges the country faces overshadow any positive investment case?
Slowing growth Economic growth has slowed largely due to a shortage of liquidity caused by a crisis in the shadow banking sector. Some of Indian Prime Minister Narendra Modi's reforms, such as demonetisation and the goods and service tax, have also impaired some sectors.
The International Monetary Fund (IMF) expects growth to come in at 6.1% for this fiscal year, down from 7% last year.
While concerns about growth persist, Ramesh Mantri, director of investments at White Oak Capital Management, notes that this figure "remains the fastest growth for any major economy".
India also faces uncertainty in the form of inflation, which surged earlier in October to a 14-month high of 3.99%.
Despite this rise, Mazars' chief economist, George Lagarias, said the fact it remains under the Reserve Bank of India's (RBI) 4% target means the central bank can "take a more proactive approach to facilitate an economic rebound".
He added the RBI has already cut interest rates by 135 basis points, to 5.15%, in 2019 and governor Shaktikanta Das has said "there is room for more rate cuts".
Ayesha Akbar, multi-asset portfolio manager at Fidelity, noted this dovishness has been a tailwind, but questioned how long the RBI can continue easing as inflation picks up.
Shilan Shah, senior India economist at Capital Economics, thinks recent fiscal loosening measures "may influence the size of future rate cuts, but probably won't take them off the table altogether". Most economists expect a further rate reduction in December.
David Cornell, manager of the £86m India Capital Growth fund, acknowledged that while "there may be some short-term slippage in order to resuscitate a weak economy... interest rates are coming down, the currency is stable, [and] India has record currency reserves at around $450bn".
He added: "The Indian government remains committed to its fiscal targets."
Modi's promise Pro-business Modi and the ruling Bharatiya Janata party (BJP), who have long been popular among investors for their fiscal reforms, returned to office for a second term in May, causing India's domestic BSE SENSEX index to surge past 40,000 to an all-time high during the month.
Investors were buoyed by the political stability offered by Modi's return to office, and positioned themselves to benefit from his pro-growth and economic modernisation policies.
In his second term, Modi's move to effectively cut India's corporate tax rate from 34.9% to 25.2%, and 17% for newly-established manufacturing companies as of 1 October this year, was a key policy for investors.
Juliana Hansveden, manager of the Nordea 1 - Emerging Stars Equity fund, explained: "It brings tax rates in line with Asian peers, which makes India more competitive as an investment destination. The tax cut could boost domestic corporate spending."
India Capital Growth's Cornell also believes Modi's reforms can help to establish India above other emerging markets destinations for international investors, calling Modi's return to office "a huge plus", and expects further "reform-based initiatives by the government designed to support further economic progress".
He added that reforms to the banking sector, and in particular the insolvency laws, will be a priority, "which will help the banks to pick up the pace of lending again".
Elsewhere, perhaps the most radical aspect of the Modi government's work to energise the Indian economy is an impending wave of privatisation, which is expected to engulf some of the country's largest companies such as Bharat Petroleum.
Lagarias described the privatisation programme as "ambitious", adding that there is a "high probability that stimulus and privatisations will help the economy over the longer term".
However, Mazars remains cautious on Indian assets. The initial euphoria of Modi's second-term reforms has also dissipated across the market, with the MSCI India index falling 4.4% over the last three months.
Lagarias said: "The catalysts required for heavier bets in India would include a manifest turnaround in governance, sustainable and more broad-based growth, privatisations and a more competitive local market."
Tech and the rising middle class One of the broad-based drivers of growth often cited by investors however is India's rising middle class, which generates greater spending among citizens and therefore could pump money into a wide range of sectors.
Rukhshad Shroff, investment manager of the JPMorgan Indian investment trust, said one of the reasons this trend has come to the fore is that, over the past four years, 325 million previously unbanked individuals have been able to open bank accounts.
This has largely been due to the implementation of unique digital identities (UDIs), which are based upon individuals' fingerprints and iris scans, and have now been rolled out to 1.2 billion people.
"We are witnessing merely the initial stages of how this feeds through into consumption of goods and services - not just in the financial sector, but more broadly," Shroff explained.
"In some cases, for example autos and pizza, Indian consumption patterns will come to look more like those we see in Europe and the US.
"In other areas India is already ahead: its huge millennial workforce already dominates viewer numbers for certain global social media and online video brands. And in other areas still, such as gold and jewellery, Indian consumers are simply forging their own particular path."
Investing in India Richard Pearson, director at Selftrade from Equiniti, agreed that India's rising middle class, combined with its growing generation of under-25s, means the country's stockmarket "looks attractive and remains relatively untapped".
"However, as an investment opportunity, India is still somewhat of a conundrum to global investors, with volatility and a lack of transparency discouraging many investors. Those looking to access this market should tread carefully, especially with recent signs that India's economic growth has slowed."
As such, he said investors should consider Avinash Vazirani's £745m Jupiter India fund, given the manager has been at its helm since launch in 2008 so is experienced in navigating the volatile market.
He added: "Investors that are keen on India but are anxious about putting all their ‘Asian eggs' in one basket, may want to get exposure to India through a broader fund.
"The most popular emerging market fund for Selftrade investors is Aberdeen Standard's ASI Emerging Markets Equity fund, which has just short of 15% exposure to India."
Nick Greenwood, manager of the Miton Global Opportunities investment trust, said he is positive on India over the medium-to-long term but has been reducing his position slightly due to the shadow banking-related liquidity issues.
"We are especially focused on the mid-cap area of the market that India Capital Growth specialises in, as these domestic-facing companies are most likely to benefit from the combination of a growing economy and the desire of the authorities to prioritise a push away from the informal, which pays no tax, to the formal economy which does," he explained.
Juliet Schooling Latter, research director at Chelsea Financial Services and FundCalibre, is investing 100% of her monthly pension contribution into Indian equity funds.
"India has been my preferred emerging market for the best part of a decade. Home to 1.37 billion people (twice the population of Europe), 27% of whom are under the age of 15, it's always been a young, entrepreneurial country," she reasoned.
"Since Modi came into power in 2014, it has gone from strength to strength and, importantly from an investment point of view, the ease with which businesses can operate there is transforming."
Indian funds she particularly likes include the £1.5bn Goldman Sachs India Equity Portfolio and the £45m IIFL India Equity Opportunities, both of which adopt a multi-cap, bottom-up approach to investing.
A version of this article was first published by Investment Week, a sister title to International Investment