Tactical Asset Allocator: India has a future too bright for investors to ignore

Rapid growth and soaring take-up of e-commerce makes the country a captivating prospect.

Warren Buffett’s comments in Berkshire Hathaway’s latest annual report reiterate his sage advice that investors should not invest in anything on a time horizon of less than 10 years. That message underscores the attractions not only of nascent sectors such as artificial intelligence, robotics and food tech, but also of the growing emerging economies that will eclipse today’s biggest markets in the not too distant future.

India, having overtaken China to become the world’s fastest-growing major economy (since 2015), is a particularly interesting prospect. Following a month of election fever across the country, votes are now in and Narendra Modi and his Hindu nationalist Bharatiya Janata Party (BJP) are in power for a second term. The BJP’s manifesto promises to make India the world’s third-largest economy by 2030. It is already set to usurp the UK’s fifth position in the global rankings this year.

Promise and problems

The past few years have been difficult, however. Despite soaring foreign investment in India , crackdowns on foreign firms such as Amazon and Walmart have highlighted Modi’s unpredictable policymaking. The period has served to remind investors of his decision to ban 500 and 1,000 rupee Mahatma Gandhi banknotes in 2016, making more than 80% of the country’s cash worthless, in a cack-handed attempt to crack down on illegal cash funds.

One problem is rising unemployment. Some 11 million jobs were lost last year, according to the Centre for Monitoring Indian Economy. Yet long term, India’s potential is stunning. The country has more people under 25 years of age than any other country, and its skilled workers can hold their own against any nation.

For the big tech firms, India is potentially the mother of all markets. Nearly 900 million people in India have never used a smartphone or accessed the internet – almost twice the number who have. New users are skipping the stage of owning a PC and going straight to smartphones to access the internet, and on an astonishing scale. Soon Indians will be the largest of users of Twitter, Facebook and almost any other social media you care to mention.

The big multinational tech companies are furiously rolling out initiatives. Google and Facebook, for example, are installing wi-fi in hundreds of sites across the nation.

That said, some local companies have held on to their leads. Ola, for example, operates a ride-hailing service in four times as many cities as Uber. Payment system Paytm’s transactions nearly tripled overnight to seven million a day after Modi’s demonetisation in 2016 led to a surge in electronic transactions. It is now embroiled in a legal wrangle over with Paypal, which shows how important this market is.

IT firms say that India seems well able to generate ideas and technical adaptations. For Netflix, which plans to make dozens of series for the Indian market, this has led to progress in the compression of video files so that they stream with less buffering. It remains to be seen, however, whether restrictions on digital payments and an e-commerce clampdown will hamper this new market.

Chinese firms are making huge inroads in India, thanks to Modi’s ‘open framework’ aiming to relax red tape and encourage foreign investment. China’s smartphone vendor Xiaomi now ships more phones to India than Samsung and Apple. It recently reported a 49% increase in revenues, despite the competitive pressure in the smartphone market and concern over semiconductor prices.

However, the company’s shares, which are trading at HK$10 (£1), have fallen well below the HK$17 IPO price last July as investors fret that its margins are being squeezed – particularly in the smartphone market, where they have nearly halved to 6%. Smartphones still account for 70% of revenues, so robust earnings growth in Xiaomi’s higher-margin internet services business will be required if the business is to really take off.

Warren Buffett also used Berkshire Hathaway’s annual results report to reveal that the company holds shares in Amazon. The online retailer delivers roughly a third of all e-commerce sales in the US. However, it is Amazon’s cloud services for small and medium businesses that are the big revenue drivers.

Revenue from these services is growing by 40% year-on-year and they are now more important than retail sales. Amazon plans to invest $5 billion (£3.8 billion) in its Indian business.

Most developed stockmarkets have tracked down over the past month, mirroring the S&P 500, as impatience grows with President Trump’s latest cat-and-mouse games with China. Discussions between Xi Jinping’s trade envoy and his US counterparts are in stalemate, while Trump’s threats look increasingly self-excoriating. Some businesses in areas such as agriculture and manufacturing are suffering. Dozens of Wisconsin dairy farmers have gone under, for example, as retaliatory tariffs have been imposed on US dairy products.

On a brighter note, US market rises this year were partly powered by corporate buybacks. Now senior US senator Chuck Schumer and presidential candidate Bernie Sanders propose limiting buybacks for companies that don’t have employee-friendly policies – that pay at least $15 an hour for example – so buybacks could multiply as corporations rush them through while they can, perhaps buying a little more time for the stockmarket in the process.

This month the Tactical Asset Allocator portfolio is going to buy units in the Jupiter India fund, managed by Avinash Vazirani, which recently fell in value when its large stakes in state-run oil refiners plunged, following an Indian government intervention in the fuel market. Our aim is to take advantage of any short-term bounce this might produce, as well as the fund’s great long-term fundamentals. The First State Indian Subcontinent All-Cap fund, managed by Vinay Agarwal, is also well-regarded. For investment trust lovers, JPMorgan Indian has been around since 1994.

The purchase will be funded by the sale of the iShares JPMorgan EM Local Currency Bond, as emerging-market assets in countries such as Ukraine, Argentina and Indonesia will be among the worst hit if global trade tensions continue to simmer.

Minor change brings major prospect in the shape of India

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Tactical Asset Allocator portfolio update

Notes: *Risk level is produced by FE Analytics and references the FTSE 100 as benchmark of 100. £10 standard interactive investor dealing charge and 0.5% stamp duty deducted from cash holdings on new purchases and sales. Cash at start of the period = £338.32. Dividends in this period: 13 GU4Z x 1.348 = £17.52; 1,000 VOF x 5.50¢ = $55 = £42.32; 4,000 GSP x £0.0415 = £166; total dividends = £225.84. Cash after dividends = £564.16. Sale of 100 iShares JPMorgan EM Local Currency Bond at £33.36 = £3,336 ($43.35 converted = £33.36). Purchase of 2,000 Jupiter India at 1.175 = £2,350. £10 dealing charge on sale of iShare ETF. Cash left after dealing = £1,540. Source: interactive investor, as at 10 May 2019.

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