India, the largest emerging economy after China, has received a major shot of adrenalin with the election of a new pro-business prime minister, who in May won a five-year mandate and a strong majority government.
“We anticipate large amounts of new direct foreign investment by corporations as well as institutional investment [in India],” says David Kunselman, senior portfolio manager and chief compliance officer at Excel Funds Management Inc. of Mississauga, Ont., a firm specializing in emerging markets. “Any investor who missed out on the early China boom won’t want to miss out on India during the next five years.”
As indicated in his recently introduced first budget, Prime Minister Narendra Modi is making determined moves to accelerate economic growth beyond the current level of about 5% annually to 7%-8% within the next three or four years, and even higher after that. If this comes to pass, India’s rate of economic growth may outstrip that of China, which registered at 7.2% in the second quarter of 2014.
U.S.-based Morgan Stanley & Co. has predicted India’s gross domestic product (GDP) will rise to US$6 trillion by 2020 from this year’s estimated US$1.9 trillion, with the acceleration coming from a potent mix of demographic trends, increasing globalization and widespread economic reforms advocated by Modi.
The resulting increase in corporate profitability, combined with an expected upward re-evaluation of price-earnings ratios for the stock market overall will create attractive opportunities for investors.
The Indian stock market has already registered a favourable reaction to the election of Modi’s Bharatiya Janata Party (BJP), with the S&P BSE sensex index rising 29.11% in Canadian dollar terms in the seven months to July 31, the best performer among the world’s top 10 stock markets. During the same period, Excel India Fund gained 32.08%.
Since its inception in April 1998, the Excel India Fund has registered an average annual compound gain of 10.6%, beating the 9.4% for the index.
Investors can also access the Indian stock market through exchange-traded funds (ETFs) such as iShares India Index ETF, sponsored by BlackRock Asset Management Canada Ltd. of Toronto, and BMO India Equity Index ETF, sponsored by BMO Asset Management Inc. of Toronto.
India’s growth is being spurred by the movement of a growing percentage of its massive population of 1.2 billion people into the middle class. Its population is relatively young, with an average age of 26 years, and the country benefits from widespread knowledge of English and a history of democracy.
The new reforms introduced in the BJP budget will see increased infrastructure spending, changes in various subsidy programs to increase efficiency, and reforms to the tax system to increase government tax revenue.
Other proposals involve the creation of manufacturing zones with tax and duty concessions, removal of restrictions on foreign ownership of companies, including defense and insurance companies, encouragement of low cost housing development, power generation and renewable energy projects.
The government plans to create up to 100 new cities, and build some 8,500 kilometres of new roads, connecting smaller towns and outlying areas to transportation hubs, as well as add to railway capacity. These measures should stimulate a manufacturing revival by opening up domestic markets, and reduce food inflation as bottlenecks are cleared up and spoilage reduced.
Excel India Fund is focusing on banks and companies that will benefit from the infrastructure spending. Among its holdings are engineering and construction firm Larsen & Toubro Ltd. and banks such as ICICI Bank Ltd., Yes Bank Ltd., HDFC Bank Ltd. and Axis Bank Ltd.
“We like domestic companies growing at high rates, and are less interested in multinationals that are tied to the global market and its slower pace of growth,” Kunselman says. “Many Indians are now buying their first car, motorcycle or house, and huge opportunities are being found in the financial sector as borrowing becomes more popular. In addition, non-performing loans will fall as the economy improves, resulting in higher profitability.”
This is the second article in a three-part series on emerging markets.
Next: Finding opportunities in frontier markets.