Australia has a low rate of investment into modern India, yet global investors from Europe, the UK and the US don’t share our scepticism.
What is making India more compelling to other developed market investors?
We can identify seven key factors:
1. Prime Minister Modi is an investment magnet
Indian Prime Minister Modi’s ability to attract foreign investors into India is often unseen as people focus instead on the politics. His big investment targets have been Japan, US, Canada and the UK.
A record was set in March 2016 when global investors bought US$4.1 billion ($5.4 billion) of shares. On top of this the PM has attracted massive foreign direct investment for the needed infrastructure to underpin urban and economic growth.
Modi’s active policy stance is feeding into the economy, with gross domestic product (GDP) growth currently above seven per cent, and forecast to be highest among the G20 economies over the next five years.
2. India is the new bright spot of emerging markets
India has become the world’s top performing major emerging market as China has slowed, and Russia and Brazil have contracted.
India’s growth has translated to higher corporate earnings and stock market returns: A key stock market index, the Nifty 50, has delivered 12.9 per cent per annum since the turn of the century and 16.2 per cent per annum over the last three years, in local currency.
Comparing India and China shows why equity investors should target India — while companies in the MSCI China have experienced earnings growth of 3.0 per cent per annum since 2000, the MSCI India’s earnings growth has been 10.8 per cent per annum over the same time.
In China — like Australia — the MSCI is skewed towards financials (38 per cent).
3. India’s small and mid-caps offer diversity
India’s stock market is home to some global giants, but the opportunities to add value in small and mid-caps is a drawcard. For investors, these companies are often in sectors investors cannot easily access in the large cap area — especially in the rapidly growing consumer sector.
The result is thousands of companies yet to be discovered by traditional investors — some suggest India is the most undiscovered small cap sector anywhere in the world.
To access these opportunities, you need to focus on investment managers who have the capability, research and experience to find these smaller opportunities.
4. Indian stock markets meet world’s best practice
India’s capital markets date to 1875 when the first ever stock exchange in Asia, the Bombay Stock Exchange (BSE), was established in Mumbai, India. The liberalisation and reforms push by India since 1991 commenced a new era in the history of Indian capital markets.
Overall the capital market infrastructure in India is now world class and on par with the best available worldwide. The stock market is massive — as of 2016, there are over 6000 companies, the world’s largest for number of listed companies, on the two main exchanges.
Whilst approximately 2000 of these companies are traded daily, there are several companies across multiple sectors to choose from. Compare this to Australia which has less than 2000 listed companies, with less diversity.
While the top ten account for a whopping 38 per cent of the market in Australia, in India it is only 27 per cent. India’s market capitalisation is approximately $2 trillion, ahead of Australia’s size at $1.7 trillion.
5. Urbanisation as a major growth engine
By 2025, India is expected to have 69 cities with a one-million-plus population, according to McKinsey.
Massive economic growth and infrastructure building will take place there. How much impact can be had by urban growth? McKinsey forecasts that in 2030 Mumbai’s economy alone will tally $245 billion in consumption, bigger than Malaysia’s economy today.
6. Manufacturing favours domestic consumption over exports
Among Modi’s first nation-building initiatives was the ‘Make in India’ program, which addresses a previous weakness. The program aims to make India a global manufacturing and design hub, and the aim is for manufacturing to contribute 25 per cent of GDP by 2020.
Unlike China, which manufactures largely for export, India’s manufacturers are tapping into a large local market with growing domestic consumption demands.
The strategy is about more than low-cost labour: it’s about driving investment, innovation, developing skills, and building best-in-class manufacturing infrastructure.
7. Youth profile unique among major investment markets
India is young, with more than half the population younger than 25, which contrasts with other investment markets with ageing populations, including Australia and China.
What does this youth profile mean for investors? The International Monetary Fund (IMF) estimates that India’s “demographic dividend” could add as much as two per cent per annum to GDP growth.
The younger generations are regarded as more ambitious, technology savvy and educated than previous generations, and set to drive domestic consumption higher for decades.
Mugunthan Siva is managing director of India Avenue Investment Management.
