China and India are the two most highly populated countries in the world. Like China, India will become a global economic powerhouse over the next 30 years. But unlike China, India is a democracy. Though its wealth is smaller than China’s, it is now growing faster with a much younger population. India is improving its governance, now 23rd on global competitiveness for perceived efficient public spending. Its 29 states now operate in a common market with a new goods and services tax – a broader tax base hopefully encouraging progress on more inclusive economic growth.
India does have huge disparity between rich and poor – the richest 1% own 53% of its wealth, compared with the US where 1% owns 37%. Such inequality limits how fast India can lift its people out of extreme poverty. Its young population is well positioned to support consumption (see chart below) with an improving business policy framework and underdeveloped infrastructure that still needs significant investment. But India’s investment options are growing quickly within Asia’s strategic investment opportunities.
Among its 1.4 billion people, 250 million are a rapidly growing middle class – so, many people seeking goods and services. This upwardly mobile middle class is 10 times Australia’s entire population and is likely to spend freely. Though we’re culturally different, Australia has a strong relationship with India via cricket. These rising Indian consumers desire the ‘comfortable life’ and they will drive India’s rising power. If Australia plans carefully to complement this demand, we may also benefit.
Investing more directly in India is also encouraging, since its rapidly growing GDP closely correlates with equity market performance over the last 15 years. To optimise its potential, India is investing heavily in infrastructure – roads, rail, ports, housing, telecoms and renewable energy projects. Though car sales are declining globally, car sales in India are booming – so traffic congestion and related pollution should continue for years. India is also the world’s second largest mobile phone maker with 10% of global production.
Embracing a digital future
Like China, India is leapfrogging into a wireless digital future, which Prime Minister Modi has enthusiastically embraced. His progressive initiatives include a broad consumption tax, curbing ‘black money’ usage and a national digital identity scheme that encourages people to open bank accounts to access Government services. This ‘Digital India’ initiative builds stable electronic infrastructure by requiring digital access to Government services resulting in efficiency and improved e-literacy among citizens. Meanwhile, the ‘Made in India’ initiative encourages companies to manufacture products in India and invest more there.
For investors, international equities have been the best performed asset class since the GFC but within this, Asian equities performed best over the last three years. Indian equity markets had a 2 year dip in 2010 due to investor concern about dependence on foreign capital for growth. But Indian equities rallied strongly in the last few years since Modi took office and his pro-business stance swept aside concerns about dependence on foreign capital.
India’s stock market is Asia’s oldest (it began in 1875) and there are now 7,000 companies listed on its two largest exchanges. The ‘MSCI India Index’ includes ~80 stocks which cover 85% of the market… of this, about 80% is in the largest companies and 20% is in mid caps. That MSCI India Index includes 24% Financials, 16% Information Technology, 13% Energy and 12% Consumer Discretionary sectors. The chart below shows Information Technology and Consumer Goods have grown strongly.
MSCI India sector performance 2013 and 2018 (% contribution to total market return)
How to invest in India?
In a market like India, we generally prefer specialist active fund managers applying their investment insight to uncover mis-pricing opportunities. Passive options like country specific ETF’s can also offer large company exposure and overall market behavior. But active, specialist managers can successfully read changes to tilt the portfolio towards preferred market sectors, uncovering less widely held growth companies.
Of course you may have other issues to resolve for your own situation. For example, is it best for you to invest broadly in Asia including India, or instead choose a specific India fund? In part, this may revolve around the size of your overall portfolio. Regardless, if you’d like some advice on this, please ring us to discuss it. In this context, you may be interested in coming to our next seminar about investing in Asia on 30th October – see below:
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.