It a great time to be invested in Indian equities. Over the past month, key indexes have climbed to new record highs and some of the nation’s greatest enterprises have reported stellar results.
Watching the recent rise of Indian markets has been breathtaking – but for investors on the sidelines, many may be lamenting not allocating to India.
So, is it too late?
Asia Markets asked Mugunthan Siva, one of the Asia Pacific region’s top Indian equity managers.
He’s currently the Managing Director of India Avenue Investment Management, which has offices in Sydney and Mumbai. Siva has around 30 years experience investing in the Asia region and has spent part of his career at the coal face, in Mumbai.
Siva says right now, there’s a strong case for an allocation to Indian equities as part of a global investment portfolio.
In fact, he believes there’s a significant runway ahead for many of India’s best listed companies.
India’s profitability is bottom of the cycle at present. Corporate profits are likely to experience a cyclical upswing and be driven by greater contribution from rising private investment, manufacturing and exports in this decade.
Siva and the team at India Avenue have just published a white paper, titled “A case for Indian equities in a global portfolio”.
Here’s some of the paper’s key findings.
The structural case for India – a strategic allocation to front-run the MSCI ACWI
- India’s underlying fundamental tailwinds can be illustrated by its falling dependency ratio (the number of dependents/the number of working age people). As China’s dependency ratio fell (troughing in 2010), it coincided with the strongest phase in its economic growth. India is now making its journey towards its trough.
- India’s trend of urbanisation will lead to increasing wealth gains and present opportunity for companies to profit for changing trends. A significant shift towards organised business is underway, which is ideal for India’s listed corporates.
- India’s exports will benefit from an increased focus on manufacturing, global partnerships and the China + 1 strategy adopted by those seeking to diversify their global supply chains.
- India’s equity markets exhibit low correlation to AUD based assets, making it an attractive inclusion in a global equity portfolio, particularly given the sustainability of its growth.
- The digitisation and financialisation of India, initiated by demonetisation is leading to a significant shift towards digital transactions, improving governance and audit trail as well as wealth shifting from physical assets towards financial assets.
- Local investors are now over 15% and rising of market cap, which is reducing the volatility of equity markets previously at the whims of foreign investors as the incremental traders.
The cyclical case for India – why now is a great time to begin
- The cost of capital has fallen (10-year bonds are 6.22%, cash rates 4%), and this is a lead indicator of the next business cycle commencing in India. During the last cycle (2003-2008), earnings growth was above 20% p.a.
- India is close to the bottom of its earnings cycle, relative to other regions. Corporates have significant operating leverage to an economic recovery, which is now underway given the country’s strong vaccination drive.
“The chart above indicates that India’s profitability is bottom of the cycle at present,” says Siva.
“Corporate profits are likely to experience a cyclical upswing and be driven by greater contribution from rising private investment, manufacturing and exports in this decade.”
However, he adds “easy” investment options are unlikely to generate the strongest returns moving forward.
“While investors may acknowledge all of the above, they tend to seek “easy ways” to implement this by looking at low-cost passive or benchmark hugging exposure offered by large investment firms with an Indian equity product as part of a suite of investment products to balance out their stable.”
“However, the Indian equity market has been a rich source of alpha over time. The benefits of this can only be provided by an actively managed exposure, willing to dig more deeply than allocating significantly to heavyweight index consituents.”
“Local fund managers in India, as you would expect, are naturally far better at understanding and knowing the local ecosystem as witnessed by their alpha generation relative to global investors investing in India.”
Look right across the market for the best opportunities
A final piece of advice from Siva – look for growth and value in parts of the market where others are not.
“On average most multi-product, asset management firms offering an Indian equity product have between 45-55% allocated to the top-10 stocks of India, akin to an Index.”
“Whilst the top-10 companies may make a strong case for inclusion, they aren’t necessarily demanding of half your exposure given that there are over 6,000 listed companies in India.
“Some of the remaining 5,990 companies are equally dominant in emerging and fast growing addressable markets and are likely to experience far higher level of earnings growth if discovered earlier than when they become significant index constituents.”
“That is the true opportunity to an investor seeking capital growth from investing in Indian equities, rather than seeking to not to underperform an irrelevant benchmark.”
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