In a world blurred by so many uncertainties, the Indian equity market is one of the few to have navigated the challenges of inflation and supply-chain disruption – to the point where it has produced a 4 per cent return in the past calendar year (versus falls of 8 per cent and 10 per cent for global and emerging market equities respectively).
This resilience was down to numerous factors – a strong domestic recovery and domestic flows were supported by government and central bank actions to soften the threat of inflation, while the spike in the oil price (India is a major importer) came and went.
India is almost the perfect example of a long-term growth story.India has been a constant presence in our multi-asset fund range since its launch in 2017. This is for a host of reasons – strong demographics, growth, few geopolitical concerns, strong corporate governance and the growing online economy.
However, this has not gone unnoticed, in fact India is arguably the worst-kept secret in the equity market.
That has translated itself into lofty valuations – versus other emerging markets and its own history. India’s valuation is around 30 per cent higher than its long-term average of 16.7 times since 2004.
It is also trading at a staggering 80 per cent premium to other Asian economies.
Indian equities have always been expensive due to those positive characteristics I have already mentioned – but these are quite excessive numbers.
That concern has already filtered through – BNP Paribas downgraded its forecasts for India in 2023 from an “overweight” to “neutral” position, based on these “stretched valuations”.
Part of that rationale is also due to the re-opening of the Chinese economy (something I talked about last month).
Marketing itself as an alternative to China, India has been a big beneficiary of the damage done to the world’s second-largest economy in the past two years.
While China’s share of the MSCI Emerging Market Index slid to 28 per cent from 35 per cent between May 2021 and December 2022, India’s rose to 15 per cent from 10 per cent.
Momentum is a major factor; Chinese equities are down 40 per cent since February 2021 – the valuation trigger could lead to some trading away from Indian stocks.
That is the short-term play – but India is almost the perfect example of a long-term growth story, and that is why investors should not be put off by the valuations argument alone.
India is set to become the world’s third-largest economy in the next decade or so, but the outlook for the next 12 months is hardly glum. Latest IMF estimates suggest the Indian economy will grow at 6.1 per cent in real terms – contrast that with 1 per cent for the US.
As a recent investment note from Schroders points out, attempts to increase manufacturing, land and labour reforms, improved tax rates and the Production Linked Incentive Scheme have, or are designed to, bolster the economy in the long term. The same is true of the 'China+1' strategy where companies avoid investing solely in China.
We must also not forget the reforms by prime minister Narendra Modi – such as the goods and services tax and the Indian bankruptcy code – all of which are designed to make the country more attractive from an investment perspective.
Another long-term factor to consider is that India is almost fully digitised now.
Almost everyone has a bank account and India is becoming increasingly prominent in the fintech space.
I remember reading that 500,000 jobs were created in the tech sector in India in 2021, with around 700,000 expected in 2022.
Even if fund flows from foreign investors are a short to medium-term concern, there is already some evidence to suggest the domestic investor will pick up the slack if foreign money moves.
Over the past two years to August 2022, individual depository equity accounts have trebled to almost 100mn from 33mn.
Investors are saving on a monthly basis, with many taking out five or 10-year investment plans.
In the second half of 2021 alone, more money was invested in Indian equities by domestic investors than was invested by foreign investors for the full seven years prior to that.
There is no doubt the reopening of the Chinese economy, coupled with inflation and interest rate headwinds, does pose challenges to the Indian economy – to the point where the argument that valuations do look expensive has merit.
However, they are only expensive in the short-term given the huge tailwinds supporting long-term growth. The fact that more than half the population of the country is under 25 years of age, with 1mn people entering the work force each month, is a great example of this.
I would be confident that anyone investing in the Indian growth story over the next 10 years is unlikely to be disappointed, given the current growth trajectory, while the additional stability in this particular emerging market underlines its ability to navigate any further challenges.
The all-weather fund
Backed by a well-resourced and experienced team, the Goldman Sachs India Equity Portfolio targets businesses of all sizes when building a 70-90-stock vehicle. The team's ability to meet companies in India differentiates it from many in its peer group.
Sustainable and long-term positioning
As the name suggests, the Stewart Investors Indian Subcontinent Sustainability Fund is about stewardship and long-term thinking.
The team tries to ignore the day-to-day volatility of the stock market and focuses on owning good quality businesses with strong balance sheets that will ultimately do well.
Most firms do not meet the fund’s quality criteria, meaning it is very different to the index.
A highly concentrated portfolio of around 35 large to medium-sized companies, the fund has historically offered a good degree of protection to investors in volatile periods.
Small-caps and domestics
Federated Hermes Global Emerging Markets SMID Equity is a concentrated fund focusing on small and medium-sized companies across global emerging markets. It can also invest in frontier markets should opportunities arise.
The fund targets a high single-digit return each year over the longer-term of five to 10 years. Just over a fifth of the fund is currently invested in India.
The regional approach
GQG Emerging Markets Equity Fund is a concentrated portfolio of high quality companies with durable earnings.
The emphasis is on future quality, rather than companies that have simply done well historically.
We particularly like the investment it has made in research and the use of former investigative journalists and specialist accountants to help give them an edge.
The fund currently has almost a third (32 per cent) of its exposure in Indian equities.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre
