The long term investment story for India is well documented.
- An enormous and youthful population,
- with huge growth potential (GDP per head is almost a tenth of the UK’s)
- a rapidly growing affluent middle class (by 2020 there will be more people with $10,000 of disposable income in India than the US)
- and a corresponding increase in consumer spending (consumer debt levels and consumer goods penetrations are low - i.e. less than 5% of Indians have a car)
Coupled with a strong performance from Indian shares in 2014, is it any wonder that armchair investors are wondering if they should be investing in India's future?
What is the outlook for Indian equities?
After last month's elections, for the first time in 30 years India has a majority Government meaning that the new Government will be able to pass new legislation and even amend the constitution of India. Both of which are seen as good news for economic reform prospects. The market is certainly banking on it (even domestic demand for Indian equities has finally turned positive after 2 yrs of selling)!!
Perhaps it is no surprise that Year-to-date the top performing investment funds across all sectors are Indian equity focused funds, typically returning over 20% buoyed by the improving economic outlook and the election of the pro-business Government.
It is anticipated that the new economic reforms will prove positive for the stock market, corporate earnings and the economy (Particularly the latter two, which have bottomed out cyclically). Average GDP growth (a measure of economic growth) has been around 5% over last 5 years and there is now hope that economic reforms will be able to return GDP growth back to its 10 year average of 7%, which in turn will boost corporate earnings and ultimately the stock market.
Fly in the ointment?
But Norendra Modi, India's new Prime Minister, might have to perform miracles to meet market expectations. The coming months will prove crucial and investors will get an insight into the type of economic reforms they can expect. Anything less than a decisive and strong government will disappoint.
But this will be easier said than done, despite Modi’s majority, there are still potential obstacles when working with state governments, potentially impeding future infrastructure projects. And Modi’s call to ‘Give me 60 months’ during campaigning underlines that the necessary reforms are part of a long term plan, not an overnight fix.
In the meantime Modi could seek to boost GDP through domestic consumption which wouldn’t need huge reforms but will investors be satisfied?
Is now a good time to invest in India?
Indian equities valuations (currently 15x forward earnings) are around their long term average. So while valuations are not excessive there are more compelling opportunities elsewhere in emerging markets from a value perspective.
In the short term investors can expect volatility and bouts of profit taking. India is no longer the screaming buy it was in the last few years, but as a long term investment play it remains compelling. Investors should drip in monthly, benefiting from price fluctuations.
But with over 5,000 listed businesses (more than any other market in the world) opportunities remain at the stock level, with cyclicals and midcaps at multiyear lows.
What are the best India funds to invest in?
There are limited choices for investors looking for exposure. JPM Indian Investment trust is the oldest and largest Indian focused investment trust. While the trust has long term pedigree, recent performance has disappointed. However, the fund has since reduced its defensive allocation in favour of cyclicals to take advantage of attractive valuations.
But there are better alternatives in the unit trust universe
Jupiter India - not only one of the top performing India focussed fund in the short term (3 months) but over the longer term has demonstrated a consistency of return with less volatility than its peers. The fund is up 28% in the last 6 months
Alternatively for those wanting exposure to india, albeit not via a focused could drip into:
First State Asia Pacific Leaders - the fund is overweight India (19.5%) versus its Index ( 6.2% for the MSCI AC Asia Pacific ex Japan Index). Other regions that the fund invests into include Australia, Hong Kong, South Korea and China. A perennial top performer despite its more defensive stance (vs its peers) and the fund is up over 20% in 3 years.
(image by By smarnad, via freedigitalphotos.net)
