While comparisons with China make India look sluggish, reforms should boost its stock market.
Investors in India, where cows have more rights than women, need to appreciate that the country, contrary to widespread belief, is some distance away from becoming the next China.
India’s 1.3 billion population may approach that of its neighbour and both countries are achieving enviable economic growth rates, while enduring chronically corrupt administrations, but India hosts the world’s ninth largest stock market and China the second, a disparity that underlines the gap between the two Asian powerhouses. Moreover, China has a command economy, and its centrally driven policies are lifting millions from the poverty trap each year. India’s highly charged and often chaotic democratic model is decades away from achieving the same result.
For investors, perhaps the most striking difference between the countries is the relative paucity of middle class Indians, the storehouse for juicy corporate returns. In China, as in many other emerging markets, the newly rich spend freely on cars, property, foreign holidays, digital devices, designer extravagances and much else. This rising socioeconomic group comes mostly from millions of hitherto poor Chinese rural workers who have progressed to much better-paid factory jobs. Their collective rise is a true global game-changer.
The same cannot be said of India, a country that disappoints pessimists and optimists alike, with the former calculating that the snail-like growth of an emerging middle class argues against opening the cheque book right now. Yet pessimists also found it easy to make a negative case for China just a few years ago, and because of the country’s debt burden, many still do. Many India-watchers, meanwhile, say investors ignore the country’s potential incoming tide of riches to their detriment.
This, more or less, is the view of Rajendra Nair, co-manager of JPMorgan Indian investment trust, which is run from the asset manager’s Asia base in Hong Kong. Interestingly, over the past year to early April, Nair’s trust slipped by 1.3 per cent, but over five years it gained 91.2 per cent. For his China stablemate, JPMorgan China, the figures were a more positive 27 per cent and 106 per cent respectively.
Nair readily acknowledges that China has taken a ‘different growth path’ from India and now boasts a $10 trillion (£7 trillion) economy – against $2.5 trillion for India. ‘But within seven to 10 years, India will have a $5 trillion economy,’ he says. China grew with a ‘manufacturing and export model. India is more domestically driven. There will be no Made in India [export] passage to increased manufacturing.'
Some India watchers fear the country is heading for a current account and inflationary ‘blowout’, a concern that Nair puts his own perspective on. ‘Current account? No. India has historically run a deficit over time, and it is now at just 1-1.5 per cent of GDP. Capital account inflows have been stronger than expected, as the underlying economic fundamentals have been strong.’ Inflation, he acknowledges, is a threat, but this is commonplace in many countries.
Politics casts a will-o'-the-wisp shadow. Narendra Modi, India’s prime minister for the past four years, has proved radical in introducing far-reaching and long-overdue reforms to help shunt India into the modern world. But in the bear pit of India’s politics, it's often said that he hasn’t been radical enough and that his hopes of curbing chronic unemployment remain just that.
Nair is not in this camp. He has Modi as a hero. He admits he was worried that the sense of euphoria that came with his election would not last. But he says: ‘I have been pleasantly surprised. A lot of the structural reforms he has introduced have borne fruit. Growth is lower than many expected, but he has still done more than any government in the past, and laid the groundwork for a strong and stable economy over the next decades.’
He singles out Modi’s ‘unique ID programme’ as almost miraculous. ‘In itself, it’s not that different from what other governments have done around the world. But bringing the programme to 1.2 billion people [and in a short period] is staggering. This brings financial inclusion, and 300 million people have already opened bank accounts.’
The World Bank estimates the plan will save the government $11 billion a year. A third of the population earns less than $2 a day and many are on benefits. Almost all are illiterate and fall victim to fraudsters. Nair says: ‘The government has started paying welfare payments into bank accounts.’ He adds that the ‘demonetisation’ of high-value rupee notes in 2017, a highly contentious move that hit both the black and white economies, has caused ‘a major surge’ in bank deposits. The ID system has also dealt a severe blow to tax evasion, he feels.
Perhaps not among the super-rich, but among the incipient middle classes, where contrasts between India and China are stark. Indian tycoons, like Chinese billionaires, can eyeball their western counterparts, since the top 1 per cent of Indians grab 22 per cent of the income pool, a third more than their Chinese soulmates. But in India, where the state-owned railway makes carriages using 1960s technology, GDP per head is just $1,700 and 80 per cent of the population produces less than that. Adjusted for purchasing power and other factors, this is more than $6,000, about half of GDP per head in China.
Only 78 million Indians make close to $10 a day, and in absolute terms, according to the 2017 global wealth report from Credit Suisse Research Institute, India has wealth roughly comparable with Switzerland, whose population is 8.5 million people, and South Korea, home to 51 million. As a Damon Runyon character might have said of India: ‘They ain’t got the scratch.’
US multinationals, whose sky-high enthusiasm for India has proved contagious with investors, are discovering this reality, or in the case of early callers, they are already well aware of it. After 20 years in the country, for instance, the McDonald's burger chain is still no bigger than it is in Poland. In China, Starbucks opens three new shops every five days; in the land of the chai wallah, it opens one a month. The uptake of e-commerce reflects the gap between India and the West: in 2017 growth in Indian e-commerce was equal to one week’s growth in China.
Apple, Google, Facebook and Amazon are picking up crumbs, while figures for airlines also reflect the level of Indian poverty: only one in 40 Indians flew abroad in 2015, and Indian domestic carriers collectively had fewer passengers than Ryanair in the year. Nair also regards Modi’s protracted simplification of value-added tax as a key innovation. Taken together, Nair says, Modi’s measures have been crucial. ‘They have been disruptive for the country, but in the long term they will give wealth creation a leg-up and bring gains from the black economy. ‘They represent a big positive for the Indian economy,' he adds.
Nair’s enthusiasm for India’s banks readily explains why financial stocks represent almost 40 per cent of his portfolio. The condition of India’s private banks is in glaring contrast to government banks, many of which are now being recapitalised to ensure their survival. Bad lending policies, liberally laced with deception and fraud, have left them with a combined $140 billion of bad loans. Private banks are now benefiting from the fallout.
‘This is a unique opportunity,’ says Nair. ‘Banks have always been among our largest holdings and, like all the companies we own, they are quality-orientated businesses.’
The trust’s portfolio contains just 32 stocks, which historically is at the lower end of the scale. Nair says: ‘At times we have had up to 50. We are bottom-up, high-conviction investors and our philosophy is to try to identify superior, long-term growth opportunities. But we only buy if the price is within our appropriate valuation framework.’ Hence a low annual churn rate of between 10 and 20 per cent of the portfolio.
Nair says the Indian stock market is currently trading on around 18 times forecast earnings for 2019. But he adds: ‘There is potential for volatility. Moreover, a general election is on the horizon. Modi remains very popular, but predicting the outcome of Indian elections is fraught with risk.’
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