Why We Should Invest In India
There seems to be a sudden flood of interest in India among the investment community. This is visible in the huge increase in foreign direct investment in the Indian stock market.
Access to the Indian market place for UK investors is fairly limited and I find that, as I talk to various individuals connected in some way to the Indian market, they are all working together, telling (selling) the same story.
One meeting would have sufficed. I have attended five. At least the story has been repeated enough times for me to remember it. And at least it is an interesting story – one which is definitely worth following in my opinion.
A (Very) Brief History of the Indian Economy
From 1947 to 1991 the Indian economy was, well, not dissimilar to our economy today – characterised by red tape, public ownership and slow growth. In the 1980s India suffered a major financial crisis (in part due to financial controls which led to high fiscal deficits but exacerbated by the collapse of the Soviet Union which was a major trading partner). India was bailed out by the IMF which in turn demanded significant changes to the way the economy was run.
In the early 1990s, responding to the IMFs demands, India opened its markets to international competition and investment.
A revival of economic reforms and improved economic policy in the early 2000s increased India’s economic growth rate. By 2008, India was the second fastest growing major economy.
The Indian economy took 60 years to reach its first $ trillion of GDP (in March 2008). However, with an estimated annual GDP growth rate 7.8% (and with the economy standing at $1.35 trillion) the next $ trillion will be reached by March 2015. Continuing at the same rate, the third trillion will be reached by 2022. This follows a similar pattern to the Chinese economy but is more conservative and therefore the time line is slightly longer. Either way, it shows that it is a realistic assumption.
Education
Despite growing investment in education, 40% of the population is illiterate and only 15% of the students reach high school. It is estimated that approximately 160,000 students go abroad for their higher education and this mass exodus of talent is very damaging and expensive for the Indian economy.
Recent reforms are opening up the sector to foreign competition. This new competition will not only raise Indian standards but will also bring in a style of teaching that will better equip students for life in the work place. Indian education needs to move away from rote learning and towards free thinking, challenging ideas and inspirational teaching.
The Indian Stock Market
After rallying 81% in 2009 there is no real expectation of a raging bull market this year. As one gentleman I spoke to surmised: “even a stallion needs to rest”!
In the last 5 years, the average growth of Sensex companies has been 8.5%. If this were to continue the Sensex index would hit 30000 by 2015. (The Sensex currently stands at 17500.)
Investment Themes
Attractive Demographics
India has some of the most attractive demographics in the world. It is home to the world’s second largest population and the population is projected to increase by “a whole new Europe” in the next 40 years. India has the youngest working population with 50% of people aged between 12 and 29. The average wage earner in India is 33 years old.
Growing Consumer Market
There are approximately 300 million people classified as ‘middle class’. They are young and ambitious and represent a growing consumer market. The challenge for businesses and companies is to keep apace with this eager and restless generation of potential big spenders.
Infrastructure
There is not an infrastructure story in India – simply an infrastructure dream. The perilous state of their infrastructure is estimated to cost the Government around 2% of GDP.
At some point this decade, the number of people in urban areas will exceed the number of people who derive their living from the land. This migration will lead to a significant increase in demand for new infrastructure and current infrastructure maintenance.
Today, 600 million Indians have no mains electricity and only 44% of rural households have access to electricity. Around half of the electricity is stolen (compared with 3% in China). This amounts to 1.5% of GDP. Almost all of the electricity is produced by the public sector.
Savings Boom
The savings rate in India is around 40% of GDP. Around 9% of Indian household savings goes into the equity market. (50% is invested in land and gold.) Using these numbers we might make the following projections:
** the savings rate in India could hit $1 trillion in 8 years time.
** if Indian households increased the percentage of savings invested in their domestic market from 9% to 15% that would equate to an extra $500 billion over the next 10 years which in turn would equate to around 150% of the current market free float. This is not an unrealistic assumption given that the more money you have in your pocket the more likely you are to take higher risks.
India Versus China
On average only 5% of an average private client portfolio in the UK is invested in overseas markets and this is typically represented by a global fund. Fortunately, Wilson King is not an average private client portfolio manager so this statistic has no bearing on our portfolios. But, it is worth considering that the question: India or China? is perhaps quite far down the road for many investors.
Our view is that the two are such different stories that they should not be compared. We invest in both geographies and are excited by the opportunities we see across the emerging markets. Our investment focus in centred on the higher growth rates of these developing countries.
One important difference between India and China that should not be overlooked is the fact that India is a democracy. (There are 700 million voters.)
The Decoupling Theory
We did not subscribe to the decoupling theory and believe it will be a long while before the theory becomes reality. India’s economy is a minnow in comparison with the US despite the fact it is growing rapidly. India (and China) is big enough to save itself but it is not yet big enough to save the world. As the economy grows the emerging middle class will start to exert more influence and bear more responsibility for supporting the economy. The stock market will become less reliant on foreign direct investment and the consumer will start to play a more important role in driving the economy.
60% of India’s export market is to the US and Europe so it is not surprising that their export market collapsed in 2008/9. The Indians are making a conscious effort to drive a larger percentage of their exports to the Asian market.
Conclusion
Investors need to understand how the emerging markets have developed over the last 10 years and look at the growth opportunities they present. Although there will continue to be periods of extreme volatility they are no longer the high risk investment propositions that they used to be in our view. Indeed, much of the volatility stems from the inflows and outflows of foreign direct investment. As stated above, when domestic investors become more significant holders of the domestic market the impact of foreign direct investment inflows and outflows should be less severe.
If we have the whole world to choose from, why would you invest in the developed world markets today? Many are suffering under huge debt piles and, in our belief, will be overshadowed by the economic growth rates of the emerging markets. We feel it is important to have exposure to the beneficiaries of the shift in power from West to East. The challenges are still several fold: timing; investing in the right geographic region; and, investing in the best vehicle to take advantage of the prevailing economic and market conditions - but we enjoy a challenge.
Our view on India is: what isn’t to like? Buy India. And the Rupee.
