5 October 2016
Investing in entrepreneurial India
By Prashant Khemka, lead manager of the Elite Rated Goldman Sachs India Equity Portfolio
India overtook China as the world's fastest-growing economy in 2015 and is on track to maintain that position in 2016. The Elite Rated Goldman Sachs India Equity Portfolio fund aims to capture this growth potential and has returned 136% in sterling since launch in 2008, 62% more than its benchmark index¹. Its research team is based in Mumbai and has been led by fund manager Prashant Khemka since 2007.
We believe India’s macroeconomic outlook is one of the best in emerging markets, and is better now than at any time in the past five years. As a net importer of commodities, the country is poised to benefit from lower oil prices going forward. Other key positives include its low and manageable current account deficit, and its lowest fiscal deficit and inflation in many years. These factors help make India less susceptible to slower global and Chinese growth than many other economies.
Why invest in India?
Beyond the macroeconomic environment, India is in the midst of a once-in-an-era transformation phase. It is predicted to have the potential to become the second-largest economy in the world in the coming decades². The country also has a staggering demographic advantage, with a young workforce likely to support domestic consumption over the long term.
In August, India’s upper house of parliament passed a bill paving the way for a uniform goods and services tax, which could be the country’s single most important structural reform in 25 years. An additional growth driver is the substantial investment in infrastructure that is already underway and gaining momentum.
Where are the opportunities?
Over the many years we have been investing in India, our bottom-up approach has enabled us to identify compelling investment opportunities across sectors in all market environments. When we look for opportunities in India today, we like businesses poised to benefit from the domestic economic recovery, such as those in the industrials, cement and financials sectors. At the same time, given that India has a dynamic and entrepreneurial services industry, we do see some interesting opportunities in export-oriented sectors such as textiles, healthcare and IT.
One example is Welspun, India’s largest towel exporter. They benefit from India’s improving competitiveness and the Make in India campaign’s renewed emphasis on manufacturing. The company is well positioned to capitalise on India’s growing share in the global home textile market due to its strategic partnerships with large retailers.
The investment process
Our India equity research team comprises six analysts based in Mumbai. Each team member has deep expertise of the local market and an average of 13 years of experience investing in Indian equities.
We always look to invest in sound businesses trading at a substantial discount to intrinsic value. We start by evaluating the attractiveness of the industry a company is operating in. We then evaluate the quality of the business, competition and management.
Company meetings are a crucial part of our process and our local presence enables us to conduct around 1,000 company meetings a year.
Finally, we look for companies where our estimate of value is significantly different from what the market has priced into the stock. We look beyond the traditional valuation metrics like price-to-earnings and pay close attention to cash flow-based metrics instead.
We offer meaningful exposure to mid- and small-sized companies, where inefficiencies tend to be high, giving them higher alpha potential. At the same time, our disciplined portfolio construction approach ensures unintended risks are minimised, leaving the majority of our risk stock-specific.
Where to next?
- India ray of sunshine amid gloomy global outlook
- The tax bill that just made investing in India more exciting
- Can India's new central bank head keep the economy on track?
¹FE Analytics, Goldman Sachs India Equity Portfolio & MSCI India IMI, TR in GBP, 26/03/2008–10/08/2016
²Pricewaterhouse Coopers, The World in 2050, February 2015
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Prashant's views are his own and do not constitute financial advice.