India – and the choice between valuations and long-term growth
This article first appeared on trustnet.com on 14 June 2022 How do you decide on the big decisions...
Goldman Sachs India Equity Portfolio marked its tenth anniversary in March 2018. Since its launch, it has returned 220%* – more than double the returns of its benchmark index, the MSCI India (92%*).
We caught up with the manager, Hiren Dasani, to get his views on how India has been transformed in the past ten years and the opportunities that lie ahead for the next decade.
“There have been lots. The economy has grown by some 123% taking it from twelfth largest economy to seventh. At the same time, incomes have nearly doubled bringing some 250 million people into the middle classes. This has had a knock-on effect across the board. Air traffic has doubled in the last five years alone, and India is now on track to become the third-largest civil aviation market in the world.
“Another interesting fact is that internet penetration in India has increased more than ten-fold over as many years, to 460 million users. In fact, you might be surprised to know that India is now Facebook’s second-biggest market after the US, with 240 million users. E-commerce has grown from $1bn to $16bn and still only represents 6% of total retail spending – so the growth opportunities are huge.”
“One of the big gripes about India has always been the infrastructure, but we have seen big improvements here too: the total length of national highways has more than doubled, making India’s road network the second longest in the world. And ten years ago there was only one city with a modern metro rail system, whereas today there are seven and another eight are under construction.”
“I believe so. India will become the third-largest economy in the world in the next decade and the middle classes should expand to include around 400 million people. Discretionary spending is likely to increase significantly, which will boost industries such as tourism, electronics, automobiles, restaurants and clothing.
“I expect the rapid rise of non-cash payment systems will also continue and, similarly, India’s technology sector is undergoing a seismic shift. IT in India has, until now, been dominated by outsourcing and IT service companies, which make most of their money from developed markets. However, there has been new wave of companies that are coming to market; India saw more IPOs in 2017 than the six previous years combined. In fact, most of India’s unicorns (private companies with an implied value of more than $1bn) operate in the rapidly growing e-commerce/consumer service segments. Among these are domestic competitors to Amazon, Uber and PayPal. So, over the next decade, I think the opportunity set for investors in India’s IT sector will be significant.”
“The politics are a risk. With general elections expected to take place in April/May 2019, stock market volatility could increase. However, investors should note that a lot of the expected future improvements are the result of reforms which have already been undertaken – so they can’t be rolled back. Still, it is something to keep an eye on.
“Another commonly-cited risk is job creation; if India cannot find jobs for the 150 million people entering the workforce over the coming decade, it could create a number of social and fiscal challenges. While we would never dismiss the scale of the challenge, we believe much of the reform agenda has been focused on tackling this. For example, the ‘Make in India’ campaign, which will ease doing business and simplify taxes, supports this objective. Additionally, the recent rise in skills-based, vocational training and the use of apprenticeship schemes can help India tackle its skills and wage issue.
“Beyond this, we would argue a major spike to oil prices would present a near-term challenge to Indian equities because India is an oil importer. But ultimately, when it comes to such binary, macro events, we recognise we have no ability to predict them. Instead, our conscious endeavour is to build a portfolio that can perform well irrespective of the outcome.
“As long as we continue to see a normally functioning government, we believe the Indian economy can grow by 7-8% per annum for the next decade. We would expect Indian companies to continue doing an excellent job of capturing this economic growth in their underlying earnings, driving compound market returns of a similar level.”
*Source: FE Analytics, total returns in sterling, 26 March 2008 to 26 March 2018