As the UK prepares for the Indian Prime Minister, Narendra Modi’s three-day visit starting 12th November (the day after Diwali), we look at the investment case for Indian equities and introduce the newly Elite Rated Goldman Sachs India Equity Portfolio.
Emerging markets have had a bumpy ride of late and, at the latest International Monetary Fund meeting in Peru last month, participants from these countries apparently voiced their growing ‘Fed fatigue’ and a wish that Yellen & co would just get on with it and raise interest rates, rather than prolong their agony. And who can blame them? However, amongst the emerging markets, there is one country that is more insulated from some of the current issues than others: India.
Now, don’t get me wrong, when I say ‘insulated’, I don’t mean ‘safe’. It is still a very volatile market. But there are more reasons to be positive about it than many other emerging markets.
Goldman Sachs India Equity Portfolio is an all-weather India fund with a well-resourced and experienced team, based on the ground in India and Singapore. It has a solid investment process and we particularly like the many company meetings the team undertake. The manager has a very good and consistent track record.
Three reasons to invest in India
- Government reforms: India is a democracy, but it has been a very messy democracy until recently. With Modi in power and finally a government with a majority, some long-needed reforms have started to take place. Modi is tackling inflation and the country’s finances (although the current account deficit is already in much better shape), rebuilding local business confidence, speeding up decision making and getting infrastructure projects up and running.
- Good demographics and quality companies: India is a very entrepreneurial society with a young, highly-educated population. Despite the reputation of corruption, this is mainly in local government and there are many quality businesses with good accounting practices in which to invest. The stock market has 5,000 companies so the market is very diverse.
- Positive earnings cycle: Indian companies, unlike many others around the world, have made a lot of capital expenditure in the past few years, to the point that there is now some overcapacity in the system. Demand is still increasing, however, so this over-capacity should reduce quite quickly and, once that happens, profits and margins will increase. The lower oil price is also helping both companies, which can reduce their costs, and the government, as the current account and fiscal deficit have been reduced.
Three reasons to be cautious
- Valuations: The Indian market never really looks cheap and, even after the market correction in April this year, valuations are still on the expensive side. However, if this is the start of a multi-year earnings growth cycle, the Indian market could still provide healthy earnings-based returns from here on out. One thing to consider is that ETF flows have made larger companies in particular more expensive, but there is still some value to be found in medium and smaller-sized companies.
- Infrastructure: India is ranked 81st out of 100 countries for quality of infrastructure and its poor state has held the economy back for many years. Their railways and roads are overcrowded – so much so that speed limits are down to 30-40km/h for trucks and buses. Rapid urbanisation means that massive investment is also required for everything from underground systems to clean water supplies, power generation and affordable housing, as well as more airports and ports. It is amongst Modi’s planned reforms, but a lot of time and money is required, and there is a question mark over whether Modi will be able to push through the much-needed reforms in this area.
- Slowing growth: In September, in a much anticipated move, the Reserve Bank of India cut the benchmark interest rate again by 0.5% to 6.75%. The move was designed to provide a bigger cushion for the economy against the global turmoil and rapidly receding inflation. Other measures have also been taken to try to keep the economy on a sound footing, including the issue of Masala Bonds, aimed primarily at foreign investors to provide a useful additional source of funding for Indian companies.
Overall, India is our favourite emerging market and we think that it will do well in the long term taking over from China as the driver of Asian growth.