Why India

The Indian economy has witnessed a paradigm shift in GDP growth since liberalisation in the 1990’s. Today it is one of the fastest growing economies in the world and this trend is set to continue over coming decades as the dependency ratio of its youthful and vibrant population dips to a low point.

Demographics

India’s demographics are the fundamental driving tailwind to its GDP growth. The population is now the second largest in the world and is likely to catch China at some point in the next decade. India’s dependency ratio (people below 15 or above 65 divided by people of working age) continues to fall (currently 48%) headed toward levels similar to China (bottomed at 36.5% in 2010). This is likely to lead to sustainably high economic growth (as experienced by China) over the next few decades as India becomes the value-added factory for the rest of the world at a cheaper rate given greater scale economics.

Growth

India has averaged 6.5% GDP per annum since liberalisation of the economy and significant reform was undertaken in 1991. However, the last decade saw a slight pick up in pace to an average of 6.7%, which was only 1% lower than the average for China. From 2014-2017 India surpassed China’s growth and it is likely to do so again in the upcoming decades given the fundamentals tailwinds at play. However, India’s growth engines of Consumption and Services may give way to Manufacturing and Exporting in the current decade, as the incremental growth leader

Low Correlation

India’s economy, demographics and growth makes it an appealing investment region for Australian investors seeking to benefit from its growth story. However, there are also other high growth regions globally which leads us to asking why India. Part of the appeal of the region is the diversity the allocation offers to investment portfolios. Given India’s unique demographics and its need for resources and commodities, it has high diversity to the Australian economy and stock market. Over rolling 3-year periods the Indian and Australian stock markets have a low average correlation of only 0.45. Countries like Brazil, Russia, South Africa and the Middle East, which form a large slice of Emerging Markets portfolio allocations, have a higher correlation to Australia given their commodity influences as exporters.

Ride the Profit Wave

India’s long-term fundamentals lend itself to sustainable profit growth for its well managed corporations who are able to leverage upon a large and growing addressable market, a lower cost base and growing adoption of areas like digital connectivity, financial services, rising infrastructure needs and offshoring and outsourcing. India’s Top 50 companies earnings have grown at 10% annualised over the last 20 years and as an investment region it benefits from diversity and lower dependency on cyclical industries with more volatile profit cycles. In general, Indian firms are able to generate higher ROE’s than their global peers due to these factors. More recently, after a decade of weak profit growth, due to low private investment, an undercapitalised banking system and high cost of capital, it is likely that India’s corporate will achieve higher compounding profit growth in the next decade due to an economic recovery, improving productivity of reforms and a pivot towards growth.

Improving Governance

India’s Corporate Governance has been improving over the last 20 years. This is increasing the interest of foreign investors in investing in India’s capital markets. However, further improvements are required. In 2019 the Kotak Committee’s recommendations will continue to strengthen India’s move from poorly governanced corporations to robust governance and a solid framework. The recommendations focused on the number of independent directors, gender diversity and director skill sets as well as splitting of ownership and management and increasing transparency. Culture, innovation and digital strategy are also to take centre stage in improving governance and transparency.
Source: Motilal Oswal

Being ahead of the curve

Global GDP is approximately US$85tn (according to the World Bank). India’s GDP is about 3% of that, which makes it the world’s 6th largest economy at present. Given its growth trajectory, India should be close to the 3rd largest by the end of 2030. From a market capitalisation perspective, India has averaged 2.4% of global market capitalisation.

Over the next decade India’s market capitalisation should rise significantly driven by the rising GDP opportunity, IPO’s (particularly in the technology space) and government privatisation. India’s weight in Global MSCI All Country World Indices is approximately 1%, which translates into most clients having less than 0.5% of their portfolio exposed to what is likely to be the world’s fastest growing major economy of the decade.

A CASE FOR INDIAN EQUITIES IN A GLOBAL PORTFOLIOSolving the EM growth conundrum