The case for investing in India
Updated 20 January 2021
The outlook for Indian equities has improved as the economy gradually emerges from the COVID-19 shock and corporate earnings improve. We believe there is a great opportunity for investors to harness growth in this country, as it benefits from structural growth trends, and an increasing likelihood that over the coming decade more technology and manufacturing jobs will relocate there from across the region, driven by US-China trade tensions and India’s own development.
Capturing returns as momentum builds
Building on the widespread liberalisation of the country in the 1980s and 1990s, India is experiencing a wave of development under Prime Minister Modi. The government’s most recent package of reforms, known as Make in India 2.0,1 could be a game-changer if executed well.
The plan is to create 100 million manufacturing jobs and increase the manufacturing sector’s contribution to GDP to 25% by 2025, from the current 16%. It also features a doubling of infrastructure spending in the next five years versus the past five years.
There are also production-linked incentives and tax incentives, and protectionist increases in import duties/ bans in areas where local manufacturing can easily substitute imports. The focus seems to be shifting from high-end manufacturing to import substitution, which seems more achievable.
Overall, we expect an immediate contribution of around 0.5 percentage points of incremental GDP growth, and eventually the multiplier effects may lead to a contribution of about 2.5 percentage points.
More on GDP growth
Over the last 60 years, India’s average GDP growth rate has increased from about 4% till about the late 1980s, to 7% to 8% now (refer Figure 1). There is still a lot of scope for economic expansion in India, ranking it one of the fastest-growing economies of the world.
Figure 1. India’s rate of GDP growth from 1961–2025
While growth has so far lagged that of its neighbouring mega-economy China, the key to speeding the rise of India’s young, affluent, urban and educated consumer base is within reach. These reforms and planned infrastructure spend will be key to unlocking the growth potential of India’s hugely favourable demographics.
A surging demographic tailwind
India has a population second only to China, and together these two countries contain more than one-third of the world’s population.2
Figure 2. The world’s 15 most populated countries
Forecasts suggest that by 2050, India is expected to add 200 million people to its workforce and will surpass China’s working population in size in five years (refer to Figure 3).
Figure 3. India’s workforce is expected to climb by 200 million in the next 30 years and surpass China’s in 5 years.
The purchasing power of the country’s emerging middle class is also set to rise dramatically in the next decade or so, with much of this spending spree driven by a surge in urbanisation.
Table 1 ranks the top 10 fastest-growing cities in the world by GDP between 2018 and 2035, highlighting these are all Indian cities. Agra, home of the Taj Mahal, is expected to lead the world in middle-class population growth according to the World Economic Forum,3 which ranked 17 of the world’s 20 fastest-growing cities over the next 15 years to also be in India.
Table 1: India is home to the top 10 fastest-growing cities in the world, 2019-35
A large domestic economy
In 2020, COVID-19 disrupted supply chains and geopolitics saw many countries enforce trade restrictions across regions. However, with private consumption driving 60% of the economy, India has the domestic demand to sustain growth, regardless of global economic trends.4
We expect the trend from globalisation to regionalisation to continue. In the face of this, India is well positioned for sustained growth with reform programs focused on investing in manufacturing and infrastructure with demand growing from a young and affluent middle class.
Indian equities are maturing
In 2020, India had a stock market capitalization of US$2.5 trillion5 and offers a broad investment universe, diversified across sectors. There are well over 5,000 listed companies to choose from.
Opportunities for growth across retail, automotive and finance industries look promising. With consumer penetration levels in cars, white goods, mortgage and retail loans lagging far behind countries such as China and the US, the stage is set for many companies to profit from exponential growth in India’s middle class.
Figure 4. Product and services penetration
Beyond consumer goods, other sectors that stand to gain from an acceleration in structural reforms include financials, industrials and healthcare. Having a strong research presence close to the market is critical to pinpoint the companies best positioned to profit from these growth trends.
The active advantage for risk and return
As a key emerging market and a proxy for global risk appetite, India took the full brunt of investor sell-offs when COVID-19 hit in early 2020. Going into 2021, while uncertainties remain, we expect the economy to continue its recovery path and the long-term structural opportunities will again come into focus.
We have a large investment team on the ground in India, backed by 400 investment professionals worldwide, so we understand the factors shaping returns and risks in this dynamic region.
With Fidelity, investors can access India’s opportunities through our Fidelity India and Asia Funds, or gain exposure via the Fidelity Global Emerging Markets Fund, which is available as a managed fund and an active ETF. The Fidelity India Fund invests in a diversified portfolio of 30 to 50 quality Indian companies.
As well as applying disciplined analysis to stock selection, the portfolio is carefully weighted for diversification across sectors and companies. This further supports our goal of delivering sustained returns and managing downside risk for investors. Recommended as a long-term holding, we aim to outperform the benchmark over a five- to seven-year timeframe.
Case Study: HDFC Bank
HDFC Bank is India’s largest private sector bank. It was among the first to receive approval from the Reserve Bank of India (RBI) to set up a private sector bank in 1994. Headquartered in Mumbai, HDFC Bank is the best run and new generation private sector bank providing a wide range of services with a focus on the non-mortgage retail lending. Today, HDFC Bank has a banking network of 5,345 branches and 14,533 ATMs spread across 2,787 cities and towns.
The company’s solid brand franchise with a dominant market share in a growth market like India, and its robust track record of product innovation and capital strength makes it a long-term holding in the Fidelity India Fund.
“ I am optimistic on the Indian economy and equities in the medium to long term due to the presence of structural drivers of growth, strong demographics, presence of quality institutions and a culture of entrepreneurship. The Fund continues to focus on owning quality businesses which are market leaders in the structural growth segments. ” Amit Goel, Portfolio Manager Fidelity India Fund
Expert access to the best investment opportunities in India
Fidelity has been investing in India for over 25 years, with a number of investment specialists based in India. Our extensive track record and presence in the country means we have a unique and independent view of factors shaping returns from Indian companies.
References: 1. World Bank Data Catalog, 2018. 2. World Economic Forum, All of the top 10 fastest growing cities in the world are in India, December 2018. 3. IMF Country Report for India, 2018. 4. HSBC, The World in 2030, September 2018. 5. Forbes, India, Not China, Is Now Central To The Future Of The BRICS, Douglas Bulloch, 20 September 2017. 6. World Economic Forum/Bain Insight Report, Future of Consumption in Fast-Growing Consumer Markets,: INDIA, January 2019. 7. World Economic Forum, How India's globalized cities will change its future, January 2019. 8. World Federation of Exchanges, Annual Statistics Guide, 2018. Important information: This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 ('Fidelity Australia'). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements ('PDS') for the fund(s) mentioned in this document before making any decision about whether to acquire the product. The PDS is available on www.fidelity.com.au or can be obtained by contacting Fidelity Australia on 1800 119 270. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets. This document may include general commentary on market activity, industry or sector trends or other broad-based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. This document may contain statements that are 'forward looking statements', which are based on certain assumptions of future events. Actual events may differ from those assumed. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity's funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details of Fidelity Australia's provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website. The information transmitted is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this in error, please contact the sender and delete the material from any computer. Any comments or statements made are not necessarily those of Fidelity Australia. All e-mails sent from or to Fidelity Australia may be subject to our monitoring procedures. E-mail communications cannot be guaranteed to be timely, secure, error or virus-free. The sender does not accept liability for any errors or omissions which arise as a result. © 2020 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.
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