How government reforms are driving investment opportunities in India
After visiting India and meeting with key cabinet members, Portfolio Manager Julian McManus believes India is on a path for strong growth, with positive implications for select companies.
5 minute watch
Key takeaways:
- Under Prime Minister Nardendra Modi, India has made significant progress in stamping out corruption and building key infrastructure. Now, having won a third five-year term, Modi’s government appears resolved to continue that momentum.
- Reforms are helping create a high-growth backdrop supportive of Indian companies and, by turn, equities.
- However, India’s progress is well reflected in many stock valuations, making it important to be selective when investing in the region, in our view.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Premium/Discount indicates whether a security is currently trading above (at a premium to) or below (at a discount to) its net asset value.
Julian McManus: I did just spend a week in India. It was a really interesting opportunity to revisit the country because the way it’s worked out over the years between COVID and so on, it’s been five years since I last was in India. And it seems that I get to go every five years, which coincidentally is the same as the Indian election cycle. So, I’ve had an opportunity, now, to see India pre-[Narendra] Modi and then post-Modi. And what’s interesting has been being able to chart India’s progress and what the Modi administration has done to really change India in very meaningful ways.
One of the first things that Mr. Modi did was to clean up that corruption, and one of the ways that that was achieved was by redenominating the currency. The other thing that they’ve changed that’s had a real impact is putting infrastructure in place. So, connecting every village with electric power, for example. Building out a network of highways and rail. That’s been a game changer.
They’ve come a long way, and in terms of understanding that journey, it’s been incredibly helpful to interact with policymakers in India. The highlight for me was spending a couple of hours with Piyush Goyal, the minister of commerce [and industry], so, one of the most influential key members of Mr. Modi’s cabinet. But also, I spent an entire day with his team who sit in Delhi, who are charged with putting these infrastructure plans together and then executing against them. And what’s really interesting is that India has a plan to become a developed economy by 2047; it’ll be interesting to see if they hit that date. But the ambition is there, and the energy in the room when you talk to these people is much more akin to what you would find at a start-up in the U.S. than a government bureaucracy.
So, in terms of the way that it plays into our process, it helps to understand at a high level that you’re going to have this backdrop for companies to grow into. You have about 7% or even 8% real GDP [gross domestic product] growth; on top of that, about 4% inflation. So, they’re growing at 11%, 12% nominal. In addition to that, the currency has actually stopped depreciating, and so instead of losing 4% on the currency every year, that’s no longer a drag. So, if you can grow 11%, 12% nominal, that’s a great backdrop for an equity market.
I think from a long-term perspective, India has nudged out China for us. China still remains a large market, and we still find some exciting ideas there. But in terms of the long-term runway, India still has way more growth ahead of it. So, it has the world’s largest population but also one of the world’s youngest. So, the average age being 28 is in stark contrast to the demographics in China. And I think quite likely the capital allocation is going to be better in India than it was in China because it’s going to be a little more capitalistic, a little less state-controlled.
But again, we have to balance that versus valuation, as well. So, India’s done quite well as a market for the last few years and arguably got a little ahead of itself in terms of some valuations. So, we’re being selective and we’re finding some really interesting, well-run discounted banks, for example, in India. Whereas in China, we’re finding different types of opportunities, more idiosyncratic biotech companies, for example, that are just trading at a discount because the market’s been overlooked.
Related insights
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
Important information
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
5 minute watch
Key takeaways:
- Under Prime Minister Nardendra Modi, India has made significant progress in stamping out corruption and building key infrastructure. Now, having won a third five-year term, Modi’s government appears resolved to continue that momentum.
- Reforms are helping create a high-growth backdrop supportive of Indian companies and, by turn, equities.
- However, India’s progress is well reflected in many stock valuations, making it important to be selective when investing in the region, in our view.