- India is volatile pick for medium term
- Favourable demographics and hopes for Modi reforms
- Investment in infrastructure, health, education needed
India is the fastest-growing major economy and the world's largest democracy, and in 2015 it was unquestionably one of the more attractive developing nations for investors.
The latest Henderson Global Dividend index shows it is now the second-largest emerging market dividend-payer, after China.
SHOULD YOU CONSIDER INDIA?
The Bombay Stock Exchange gained 142 per cent over the last 10 years; but over the last year it has lost 1.9 per cent, while India-invested funds and trusts have struggled (see tables below, click to enlarge) - at least partly reflecting concerns that the country's broad political reforms are foundering.
We talked to emerging market and specialist India fund managers to establish how strong a case there is for long-term investors to consider exposure to India.
India is well positioned to benefit from its demographic. Only 6 per cent of the country's population is aged over 65, and almost 30 per cent is below the age of 15 (though the birth rate is slowly falling, with about 20 births per 1,000 people, according to World Bank data).
This contrasts with the UK, where almost 18 per cent of the population is above retirement age.
'Many countries in the Middle East and Africa remain, sensibly, off the agenda for most private investors, despite their youthful populations. A badly run country or one with civil strife is unlikely to fulfil its potential. It is arguable that Nigeria has fallen into this category.'
In the political arena, the election of prime minister Narendra Modi in 2014 brought high expectations that he could drive a series of reforms in its wake.
But initiatives dubbed 'Made in India' and 'Digital India' and plans to bring in labour market reforms, tax reforms and deregulation have not yet lived up to their expected success in moving the economy forward.
Euan Weir, investment manager with responsibility for Asian equities at Kames Capital, says: 'There was a lot of excitement when Modi first took over, but then the consensus seemed to be that he failed to achieve key reforms.'
Weir believes that the market actually expected too much, and that 'the reforms that are ongoing are significant ones and [will be] exciting for India in years to come'.
FIGHTING CORRUPTION AND BUREAUCRACY
More than 900 million people have signed up to the database, which now covers more than 90 per cent of the adult population.
Weir says the scheme 'allows the government to deliver its services in a transparent way and avoid leakages', paying benefits directly to those in need rather than relying on middlemen - a crucial step in fighting corruption and bureaucracy.
The government has also been encouraging financial inclusion and transparency, says Weir: as more people open new bank accounts, banks gain client information, which further helps to fight fraud, shadow banking, loan sharks and cheating.
In addition, Modi's proposed goods and services tax, which is similar to VAT here, would remove multiple layers of tax and replace them with one rate of tax.
'Modi is trying to push through a simplified national tax system, but is repeatedly thwarted by political wrangling,' says White.
Extra tax revenue is vital for the country to invest in its infrastructure, education and healthcare systems, which are currently lagging behind those of other countries in the region.
These political hurdles have caused the Indian market to stutter in recent months, argues White. 'Additional short-term threats include further spillover from China's current slowdown and potential US interest rate rises,' he says.
'Despite this, India's demographic attributes and supportive government suggest it is an exciting if volatile bet over the medium term, with recent share weakness offering a buying opportunity into one of the better emerging markets in 2016.'
India is a market that many companies consider ripe for 'disruption' by innovative technologies, says Kunal Desai, manager of the Neptune India Fund.
He believes the drivers for this include the 'fast pace of change - for example, skipping from 2G to 4G data networks without widespread introduction of 3G.'
Commenting on what they think the winning sectors might be, the co-managers of JPMorgan Indian investment trust, Rajendra Nair and Rukhshad Shroff, say: 'We are overweight financials, building materials and construction stocks, as well as consumer discretionary stocks such as autos. We are generally underweight the IT exporters and global commodities.'
India is set to be the fastest-growing economy in the world this year, with GDP expected to rise by 7.3 per cent, comfortably outpacing China. But the past few months have brought market uncertainties, due to the slowdown of the Chinese economy and sharp falls in commodity prices.
OIL PRICE BENEFIT
Nonetheless, 'among emerging market economies, India seems to be one which is less impacted by these external factors,' says Luke Ng, senior vice president of FE Research Asia.
He argues that unlike other emerging Asian economies, the Indian economy is less reliant on exports and trade with China, and therefore investors have fewer concerns over the implications of the Chinese economic slowdown.
At the same time, he says, India is a commodity importer, and oil accounts for around 35 per cent of the country's imports. India has therefore been one of the beneficiaries of the oil price correction, as it helps lower the cost of production, inflation and current account deficit.
The JPMorgan Emerging Markets investment trust has a high regional weighting in India of around 20 per cent.
When asked why he favours India over China at the moment, portfolio manager Austin Forey says: 'Question marks linger over the long-term ability of Chinese companies to deliver sustainable profits to investors.
'Chinese companies tend to be subject to greater government involvement, making us more inclined to question their duration potential.
'Our investment process therefore leads us away from a number of Chinese stocks, particularly state-owned companies which tend to be of lower quality and have a number of governance concerns.'
In India, however, his team is 'able to find numerous companies that meet our quality standards, given their enduring competitive advantages, strong cash flow generation and skilled management.'
Andrew Swan, head of Asian equities at BlackRock Asia fund and BlackRock Asia Special Situations fund, concludes: 'India will continue to emerge as a growing economy. But the speed of development will be slower than in neighbouring China - a side-effect of being the biggest democracy in the world.'
ADVISERS' INDIAN FUND AND TRUST PICKS
Darren Cooke, chartered independent financial planner at Red Circle Financial Planning, likes Stewart Investors Indian Subcontinent. 'The fund has performed consistently well over the medium term, returning more than double the benchmark over five years,' he says.
Gavin Haynes, managing director at Whitechurch Securities, recommends New India investment trust, managed by Aberdeen's highly regarded Far East team.
'It focuses on well-managed businesses with healthy regard for shareholders. India has fallen out of favour with many investors, but as a result the trust now trades on a discount of 12 per cent, which could be a good entry point for long-term investors.'
Michael McLintock director at Adelp Financial Solutions, says: 'I like Jupiter India. Avinash Vazirani identifies undervalued business with growth prospects and waits to buy them at the right price. He holds onto them until the market catches up to his valuation, or the growth prospects diminish.'
Dean Mullaly, managing director at Mark Dean Wealth Management, says: 'India should be a part of most people's investment portfolio, but probably only around 5 per cent.
It will swing in and out of favour, so perhaps the correct way to gain exposure is through an emerging market or Bric fund/ETF, leaving the decision as to how much is allocated to each region to the fund manager.'
Minesh Patel, chartered financial planner at EA Financial Solutions, says: 'I prefer a broad-based emerging markets fund incorporating India, as single country emerging markets funds can be volatile.' He recommends JPM Emerging Markets investment trust and Fidelity South East Asia fund.