Looking into India’s economic backdrop, outlook and opportunities for investors.
How India could soon become the fastest growing economy in the world
During Q4 2018, the global equity market experienced a wide spread sell off which saw the investor get stung. India’s stock market however, managed to insulate itself from this latest turbulence, with MSCI India outperforming both MSCI World and MSCI China by 16.33% and 13.58% respectively. This month we are looking into India’s economic backdrop, outlook and the opportunities that we see for investors.
In recent years, India has enjoyed good macro conditions, led primarily by subdued inflation, lower interest rates and commodity prices, especially oil. The country also has a manageable current account and an appreciating currency, which have both contributed to these positive conditions.
India has been growing rapidly compared to most developed countries and is expected to continue at a consistently high rate for the next few decades. China currently stands as the world’s fastest growing economy, but with India’s predicted growth trajectory, it could take the title in the foreseeable future, a prospect that has not gone unrecognised. This is to the credit of ambitious government reforms, rising consumer demand, highly educated human capital and an enhanced foreign investment environment.
India GDP annual growth rate
China GDP annual growth rate
Tax reforms: Out with the old and in with the less convoluted
Over the last couple of years, India’s government has rolled out a number of tax reforms with the goal of unifying the entire country into a one-nation and one-tax common market. It will support business growth as it simplifies India’s Byzantine tax system, which is currently a tangled mess of local, state and national laws. As a result, manufacturing costs should come down, in turn making Indian exports more competitive, whilst taxes on commodities are also expected to fall, lowering prices on end products.
Alongside these reforms, the Government plans to invest highly in the infrastructure sector, mainly highways, renewable energy and urban transport, bringing numerous economic opportunities with it.
The latest consolidated foreign direct investment (FDI) policy liberalises rules for several sectors, including defence, construction and broadcasting, with the hope of making the regulations governing various sectors clear to potential investors. The "Made in India" initiative aims at transforming the country into a global manufacturing hub, whilst scrapping the foreign investment promotion board has removed a layer of bureaucracy when gaining approvals for foreign investment.
De-aging a country: India’s youthful population
India is set to become the world’s youngest country by 2020 with 64 percent of its population in the working age group and the average age set to be 29. With an astounding one million people entering the labour force every month, India abounds with young human capital essential to driving output and consumer spending over the long term. Furthermore, some 70 percent of India’s population still lives in rural areas meaning that the urbanization has the possibility of boosting productivity and consumer spending even further.
On top of all that, India has one of the most developed higher education systems across the globe, with English being understood and used commonly as a medium of spoken and written communication. The system has been proven to produce a vast quantity of high quality graduates that will become the driving force of innovation, management and productivity. Ultimately, the education system also produces the surging numbers of India’s middle class, further pushing the consumption on high end goods.
What this means for a prospective investor
In the long-term, India’s economic potential looks very attractive. The outlook for India’s stock market remains positive on expectations of further economic reforms and lower interest rates, whilst surging consumer demand and growing corporate earnings also supports this. In the past, India’s stock market has traded at a premium but currently it is traded below its historical average and when compared to the emerging market as a whole, the valuations are expensive right now. This might deter short-term investors and those looking for lower cost assets, but today’s expensive stocks may become irrelevant in the future because of India’s significant opportunity for growth.
The following funds have been long established and managed with discipline. These funds have the potential to capture the opportunities presented in the rising of India over a long run.
Aberdeen Global Indian Equity aims to achieve long-term total return by investing at least two-thirds of the portfolio in equities and equity-related securities of companies operating in India. The fund is managed by a team of Asia equity experts.
Jupiter India seeks long-term capital growth by investing in companies operating in India and up to 10% of its total assets in companies based in Pakistan, Sri Lanka and Bangladesh. The manager, Avinash Vazirani, has been managing the portfolio over 10 years and his stock picking skill has contributed to the success of the fund.
Stewart Investors Indian Subcontinent Sustainability is set up to grow investment by investing in shares of companies based in or having significant operations in India, Pakistan, Sri Lanka or Bangladesh. Consideration is given to investment in companies that are positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate.
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.