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Investment Insight: India as Asia’s New Powerhouse

With the UK’s most recent economic figures showing a likely slowdown in expansion and the US potentially moving toward the same, investors might be forgiven for looking elsewhere for returns.  Even China, the current ‘powerhouse’ of global growth in recent years, has lower growth targets now as the country has matured enormously over the last decade.  Against this backdrop, India – the world’s largest democracy – has become a relevant and exciting prospect for growth-hungry investors.

The Power of People

Possibly the most potent force behind the Indian surge is demographics.  Boasting a population size second only to China, India will have 900 million people of working age by 2020, and should reduce an already impressive unemployment rate of just 4.9%. Assuming Prime Minister Narendra Modi continues his current popularity, his reformist and business-friendly government will preside over projected growth of 6-8% per annum.  For an economy whose stock market has historically outperformed its economic growth, the case for investing into Indian equities is compelling.

Governmental Reforms

India has undergone enormous change in recent times and, as with any major national evolution, some necessary reforms have had to be implemented to enhance the country’s tax infrastructure and to combat counterfeiting.

A one-off demonetisation occurred last year in which 500 and 1000 rupee notes were withdrawn from circulation and replaced with new, more secure notes to nullify the stock of counterfeit notes in circulation.  The effect of removing these commonly used denominations was expected to impact the economy much more than it eventually did, but consumer stocks were curtailed temporarily.

The Goods and Services Tax (GST) was implemented on the 1st of July 2017 and is a tax at the point of sale, similar to VAT.  Nicknamed the ‘Good and Simple Tax’ by Modi himself, its introduction meant the end of multiple taxes at various stages of manufacture.  This is seen as a major advance toward a unified national market, though the rate is not a universal one, but has four different levels with advantageous rates for precious stones and gold and a higher band for carbonated drinks, luxury cars and tobacco.  While this has certainly impacted some activity – much buying was brought forward to avoid the levy – the effects are likely to be transitory and growth should be maintained.   Ultimately, it is estimated that the move will add 1% to GDP by 2022.

Other reforms implemented by Modi’s government include ‘Make in India’, which set out to encourage domestic and international companies to manufacture products within the country, and ‘Skill India’, which aims to train 400 million people in various different skills.

The upshot of huge progress and an ambitious leader are that corporate profits are expected to rise significantly over the next few years, so how can we benefit from this?

Intelligent Investing

Investing in Indian equities has been very fruitful in recent years and its stock market index, if invested in directly, would have made around 90% return over the last 5 years.  However, most actively-managed Indian equity funds have achieved much higher returns over this period, some over 150%.  This shows that the Indian market is a good example of an ‘inefficient market’ which is one that is better served by expert managers, who can identify successful companies rather than gaining exposure by simply buying the entire index (via a passive Exchange Traded Fund).

Our Gibbs Denley Investment Model Portfolios started investing directly in Indian funds in early 2015 and this exposure has grown substantially as our optimism for the country’s development has intensified.  We now have significant exposure to India across our Balanced and more adventurous models and remain excited about this unique opportunity.

Tom Sparke, Investment Manager, IMC, CertPFS (DM)Tom Sparke IMC, CertPFS (DM)
Investment Manager