The changing face of India

Sheridan Admans looks at the changing political climate in India and reviews opportunities available to investors.

Article updated: 20 February 2018 10:00am Author: Sheridan Admans

The most populous democracy in the world and projected to overtake China by 2028 as the most populous nation on the planet, India is the world’s 6th largest economy. In this month’s piece I will look at the political change in India and the pro-business reform agenda being pushed by its Prime Minister, as well as opportunities available to investors that are seeking economic exposure to the region.

The changing face of India

The election of Narendra Modi in May 2014 was a turning point in India’s economic fortunes and its position on the global stage. Modi’s government has been focused on a pro-business reform agenda. The progress his leadership has made was recently acknowledged by the ratings agency Moody’s when it upgraded the country’s local and foreign currency sovereign ratings to Baa2 up from Baa3 and elevated its outlook to ‘stable’.

Other significant government policies have seen the rollout of the Goods and Services Tax (GST) to help unify one of the world’s most convoluted tax regimes and anti-corruption measures, which involved the removal of high value banknotes from circulation to help boost tax receipts and support the move to a digital economy.

Under Modi GDP growth has been recovering, which over time should contribute to a reduction in government debt. There has also been a pickup in corporate earnings. All of which has seen it moving up into the top 100 regions worldwide for ease of doing business, up from 142 when Modi took power, with the outlook still encouraging.

Other long-term factors of note

  • Regional election outcomes in India in March 2017 were more pro-Modi than many were expecting. This potentially increases the chances of his government taking a second term comfortably when elections take place in 2019.
  • Population growth and a high proportion of the population being of working age are good news for the economy. India boasts one of the most enviable demographic profiles of the world’s major economies.
  • A growing, educated middle class that is becoming more affluent is likely to drive demand for goods and services.
  • Inflation has been falling helped by a steadying of the price of oil around $60. Over the long-term, lower inflation should be supportive of consumer borrowing power giving an additional boost to demand.
  • The government has been targeting projects to improve infrastructure, support the rural economy, promote small and medium size enterprises and focus on fiscal consolidation, which should be a catalyst for long-term sustainable growth.
  • Introduction of GST overtime should help India navigate its way out of its trade deficit into an export-led growth economy.
  • India still has a number of hurdles to jump to elevate more people off of the poverty line, requiring large investments for improving health, education, transport, telecommunications, energy and utilities.

Not all upside

As with every investment opportunity there are risks. One that investors will face into is a rising oil price due to India’s significant reliance on oil imports. Rising prices will likely result in higher inflation.

Investing in India has been a popular trade since 2014 and there has been a rush in that time by international investors to capitalise on India’s potential. While this has helped propel asset values it can disproportionately effect values should the risks in the region rise.

India is generally considered a higher risk region of the world in which to invest. It is considered inherently more risky due to a number of factors such as the lack of high quality research on companies, accounting standards and transparency, along with political and economic stability factors.

Investment ideas to passport you into India

A number of factors are converging that have been giving India prominence on the global economic stage. This includes high growth rates in the industrial and service sectors, significant population growth, strong domestic demand, as well as a Government that is pro-business. This mix, in our eyes, subsequently makes the country hard to be ignored as a long-term investment opportunity. The International Monetary Fund (IMF) currently projects India’s growth to accelerate in 2018-19 to 7.4%, which potentially positions it as the fastest growing major economy in the world.

Funds and an investment trust you may want to consider if you are thinking about an investment in the region are:

Jupiter India the manager’s style of investment is very much identifying companies on the strengths of their fundamentals. He principally uses a process referred to as a GARP measure (Growth at a Reasonable Price). However, if an opportunity exists, he will be prepared to pay a premium if the earnings growth compensates for this. The manager invests across the capitalization scale.

View Jupiter India fund

Goldman Sachs India Equity Portfolio The management investment philosophy resides in seeking strong returns that they believe are earned over time by investing in sound business at a substantial discount to intrinsic value. Management execution capabilities tend to favour companies that are in the mid and small-cap spectrum.

View Goldman Sachs India Equity Portfolio

JPMorgan India Investment Trust the trust, which was launched in 1994, aims to provide capital growth from a diversified portfolio of Indian investments. It is managed by Rajendra Nair and Rukhshad Shroff who have a dedicated team within a 75-strong pacific regional group. They focus on company visits and research to discover attractively-valued stocks. For a single country fund it is relatively large, with a market cap of around £780 million. The trust can use gearing of up to 15% of net assets.

View JPMorgan India Investment Trust

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Sheridan Admans portrait photo
Sheridan Admans

Investment Research Manager

Sheridan co-manages our TC Share Centre Multi-manager funds and heads our team of research analysts. He is a chartered wealth manager and qualified financial adviser, and his qualifications include the Securities & Investment Institute (SII) Diploma and an MBA in investment analysis.