The future is bright
As a business we’re often asked about India and why investors should consider allocating either through a stand-alone allocation or exposure through an emerging markets portfolio. On one hand investing in one of the world’s fastest growing economies sounds sensible but equally investors have concerns around volatility and risk, particularly macro risks. So, let’s take a closer look at the case for India.
Big and getting bigger
One of the most obvious reasons to invest is the size of India’s economy and its rate of growth. It’s now the seventh largest and the fastest growing major economy which should see it move into a top five position in the next couple of years1. India is today essentially in the position China was 15 years ago - poor but growing and growing fast!
GDP per capita – India is where China was in 2006
Source: World Economic Outlook Database, October 2018
India’s economy is not only big, it’s diverse. There’s a huge number of companies across industries and sectors in which to invest.
India has a broad investment universe
Source: Thomson Reuters Datastream, Fidelity International, January 2019
If we look at the top contributors and detractors to performance for Fidelity’s India Fund for the last 10 years for example, we can see they’re quite different. HDFC bank, the largest contributor is one of India’s largest private sector banks. Low cost products and good asset quality have given it a strong competitive advantage in an industry which is expanding rapidly as people swap from state owned banks to more efficient private ones. Maruti Suzuki, another top contributor is India’s largest passenger car manufacturer, holding a dominant position and strong brand equity in India’s underpenetrated automobile market. Conversely an underweight position in software services company Infosys detracted from performance.
“Performance at a sector level has been well spread out. All sectors, except consumer staples, where we have been underweight due to expensive valuations, have made a positive contribution to relative returns over the five-year period” commented Fidelity Portfolio Adviser Sandeep Kothari.
India’s large and diverse economy means that investors have access to a broad investment universe and benefit from greater diversification which is quite a different proposition from investing in many global equities portfolios which are often dominated by mega-cap tech stocks.
The other obvious reason to invest is of course the potential to generate strong returns. Over the last 20 years Indian equities have returned 9.6% annualised returns in AUD terms despite some short periods of volatility2.
But what about the macro risks?
Currency fluctuations, an upcoming election, not to mention a potential trade war between the US and China. Just how resilient is India to these types of issues?
On the positive side, India has a large domestic economy with a number of structural drivers such as a young and growing population, increasing penetration of goods and services, rising urbanisation and efficiency gains due to infrastructure development. As a result, about 70% of GDP comes from private consumption and the economy has a structurally higher growth rate of around 6% to 7%. Furthermore, India’s share in global exports is less than 2% and its exposure to China and the US is lower than many making it quite resilient to a trade war3.
On the other hand India may not be completely immune. Importantly, India runs a trade deficit and it is one of the largest importers of oil. A rise in oil prices and/or depreciation in INR versus the US dollar would adversely impact its trade balance and create inflationary pressures on the economy. In addition, the Indian economy is dependent on foreign capital. Fund flows into the country could reverse if a trade war lead to higher inflation in the US, rises in US interest rates and the resultant strengthening of the dollar.
India’s general election in May also has the potential to generate some short-term volatility. Fidelity Investment Director Medha Samant doesn’t believe this to be a huge area of concern. “A win for the Third Front coalition would be the worst-case scenario. We think that’s unlikely but if it were to happen the impacts should be relatively short-term as economic reform has been pretty consistent under various governments.”
Chart 3. Long-term uptrend despite short periods of volatility