India's prime minister, Narendra Modi, is a divisive figure, but since the start of his first term in 2014 he can be credited with introducing far reaching reforms that have improved productivity and reduced corruption. His intention to make India more business friendly has been clear and successful, writes David Cornell.
Reforms such as the implementation of the Goods and Services Tax and the Insolvency and Bankruptcy Code have simplified complex systems and increased accountability. The country moved from 134th in the World Bank's Ease of Doing Business report in 2014 to 63rd in 2020.
Furthermore, the recent cut to corporate tax rates has made India increasingly competitive as an FDI destination. The implementation of Modi's bold reform agenda has undoubtedly generated some undesirable results, but the benefits of these quite radical policies are now being felt and in the long-term will improve the overall efficiency of the economy.
While the prudent investor exercises caution in each investment decision they make, India's growth trajectory paired with the current value in the market suggests that the balance of risk/reward is highly favourable."
Yet despite this, much of the financial media's dialogue surrounding India over the past 18 months has taken a decidedly bearish stance. While the prudent investor exercises caution in each investment decision they make, India's growth trajectory paired with the current value in the market suggests that the balance of risk/reward is highly favourable.
In the short-term, a liquidity crisis, a national election, ongoing implementation difficulties as a result of key structural reforms, among other elements have contributed to a period of risk aversion and uncertainty in the Indian economy. In response, there has been a wide divergence in the market as investors sought out relative safety in a handful of large cap stocks. Small and mid-cap companies, along with the remainder of out-of-favour large caps, witnessed a significant correction in share prices.
Although undoubtedly a difficult time for much of corporate India, the long-term outlook has not wavered in the opportunities that it can offer. The country's demographics lend themselves to rapid development, with over 50% of the population being below the age of 25.
A large working population and a low dependency ratio have contributed to a strong appetite for consumption, something which is evidenced in India's data consumption per user. On a monthly basis, this averages at around 13GB per user (as reported by Bharti Airtel), the highest in the world by some margin (for comparison, this is double that of China), and even in the face of a recent slowdown in consumption this has not reduced.
India's tech revolution is unlocking a huge amount of potential in the way of productivity gains, and there is still significant ground to be made. While more established markets such as China are boasting almost 80% penetration of 4G users, India's sits at just above 30%; there is still a lot more growth to come.
The expanding young population has also influenced the way that business is conducted, particularly as India continues to benefit from a reverse brain drain; the country is welcoming back an influx of individuals that sought education or employment abroad, bringing with them a keen knowledge of best practice.
Management quality in Indian corporates is already high, and many of the world's leading companies boast Indian CEOs (Microsoft, Alphabet and MasterCard are just a few). A talent for guidance paired with an entrepreneurial mindset means that corporate governance in India is constantly improving, and as the next generation of professionals take on the running of family businesses, corporate India should reap the rewards.
When viewing the country against its Global Emerging Market peers, the India story becomes even more exciting. Although 13 years behind China and 32 years behind Brazil in terms of GDP per capita, India is growing fast off a low base.
The long road
Over the past 20 years, Indian markets have compounded at 8.4%, while China and Brazil have fallen behind at 5% and 5.7% respectively. It also boasts a broad range of investable sectors, many of which are globally competitive. For bottom-up stock pickers such as ourselves, there is no shortage of opportunity. For offshore investors seeking to tap into the story, full upside potential can best be accessed through single country funds.
There is undoubtedly a long road ahead for India, but the foundations are being laid. The macro picture looks healthy; a sustained period of low inflation, a stable currency, a crackdown on corruption and the recent fall in oil prices all position India well for a strong recovery.
As valuations have tumbled in the wake of an economic slowdown, now more than ever seems to be the time to buy; market volatility is offering up opportunities to enter at attractive prices, particularly in the small and mid-cap space where the India Capital Growth portfolio is positioned.
The growth potential of small and mid-cap stocks combined with our long-term approach means that the fund is able to fully maximise on the compounding returns that these companies offer, ironing out periods of underperformance along the way.
While we cannot predict exactly when a turnaround will happen, we do know that when it does, it will happen quickly, and those slow to gain exposure risk missing out on strong returns.
David Cornell is chief investment officer at Ocean Dial, in London