A vast country, of some 1.3 billion people, India is now firmly on the radar as the fastest growing major economy in the World – forecast widely to become the third largest. I have two clear messages for any investor in India.
The first is that, in my opinion, India deserves investment as a single country fund allocation in our portfolios, albeit it a high risk portion – not simply exposure within a broader Global Emerging Markets or Asia allocation; these in most cases will afford exposure only to India’s largest companies, which often have already experienced their fastest growth. Once convinced on this first point, the second is how best to access the Indian growth story and its equity market; although there are a variety of funds available to UK investors, I believe investing with a manager based in India, affords an advantage – a view I have formed after spending considerable time with India’s largest investor.
To really understand how India’s economy and stock market can grow, adding billions of dollars of value and wealth creation – we must consider the critical drivers that can deliver this. Whenever there is long-term sustainable economic growth in the World, two cornerstone pillars always exist; the country must have good demographics and its productivity must be improving.
On demographics, India has the World’s second largest population which is getting younger and wealthier (a quarter of all mankind born since January 2000 are Indian), with strong middle class growth. India is also coming from a low productivity base, currently 22 times less productive than China, and 50 times less than America, however improving infrastructure and technology alone will help to underpin change. India’s demographics and improving productivity could deliver multi-trillion dollar growth in India’s economy and stock market.
There are of course many other contributing factors, let’s focus here on just two. The first is Narendra Modi, India’s dynamic Prime Minister. Modi has already effected considerable change and reforms and persuaded many of the World’s most senior leaders and corporates to partner and invest in the country’s economic growth miracle – it is the very fact that he is cleansing the system, fixing supply side bottlenecks and implementing policies to deliver long-term structural growth, rather than short-term populist policies, that is attracting the world’s interest. Indeed, his recent unprecedented reform (Demonetisation) was a very bold move to reduce corruption and the black economy, not to mention the potential for increased tax collection and bringing approximately US$220 billion into the banking system very quickly.
Despite its huge population and high savings rate (currently c. US$600 billion per annum saved), a mere 2.5% of India’s savings presently goes into equities – this is a lot higher in most other countries. It would take very little for a small change in the savings pattern (accelerated by Demonetisation) to transform the Indian equity market and the shift from physical savings to financial savings has already started.
So why do I think it is important to invest with a manager based in India, particularly when there is so much information available in the world today? Partly, because despite India having over 5,000 listed companies, only around 100 are well covered by the brokers. In other words, most of the market has little or no research coverage. Why does this matter?
Clearly an investor would commit only to companies which they are aware of, and where those companies are thought to have growth potential. Fifteen years ago there were barely any IT or Pharma stocks listed in India, yet today there are huge companies in these sectors. In a country experiencing such long-term sustainable economic growth and multi-trillion dollar wealth creation potential for the stock market, many new sectors and themes are now emerging.
Many companies in India face the potential of transformational growth and in my opinion is much easier to spot these opportunities if you are on the ground. Today India has many companies with multi-trillion dollar market caps, which ten to fifteen years ago were much smaller and virtually unknown.
The real opportunity for investors is not only to tap into this highly sustainable and stand-out growth story, but to invest into the fastest growing parts of the economy – into companies with the potential to generate multi-bagger returns in the years ahead.
Spike Hughes is Founder and Chief Executive Officer of Cohesion Investments
Having started his career at Scottish Widows, Spike has since been a pioneer for a number of businesses setting up their investment propositions. One of the founders of the Skandia Investment Group, Spike innovated the Best Ideas funds, at the time considered the biggest fund launch the industry had witnessed, as well as fund ranges including the Skandia Asset Allocator range and the first REITS fund in the UK market. Prior to this Spike was founding Managing Director of Hargreaves Lansdown. Spike used these experiences as Strategic Adviser to Crispin Odey, contributing to the launch of Odey Wealth and also as Strategic Adviser to the CEO of AXA in launching the Architas multi-manager business.
Cohesion Investments is the distributor for Reliance Nippon Life Asset Management (RNLAM), which is a leading asset manager in India with its mutual fund arm managing average assets under management of over US$47 billion for over 6 million investors. They have been managing funds for more than 20 years.