India celebrates its new year or Saka next Wednesday. It will be a day for rejoicing with many investors joining in the celebrations.
Viewers of the popular BBC programme The Real Marigold Hotel, now in a second series, will recognise the country but the nation’s hive of industry and emerging youthful talent were not revealed.
India is enjoying dramatic economic growth, estimated by the IMF at 7.2 per cent this year and by the country’s Central Statistical Office at 7.1 per cent. Compare that with 1.8 per cent in the UK, just over two per cent for Europe and 2.3 per cent for the US.
Such growth makes India the star emerging market, even surpassing the questionable claim that China is likely to grow by 6.5 per cent this year.
The forecast for India would have been even higher at 7.6 per cent growth had the Government’s decision to scrap high value currency notes – representing 85 per cent of the cash in circulation – in November not impacted.
To offset the problem, Prime Minister Narendra Modi has cut taxes for the less wealthy and small businesses and increased infrastructure investment by almost US$60bn.
Demonetisation should actually bring greater transparency and a more efficient economy, enhancing trade and ties with developed economies.
“India is one of the few equity markets I like. It’s an entrepreneurial society and the demographics are great with a young, mainly educated population and growing middle class,” says Juliet Schooling Latter, research director at Chelsea Financial Services. “Modi is very pro-business and reforms, whilst slow, have been positive.”
Martin Payne at wealth manager Brewin Dolphin in Leeds is encouraged by the reforms which include an ID programme enabling millions to open a bank account for the first time.
Yet he stresses that India should still be regarded as “a higher risk investment” but adds that for investors who are prepared to be patient and ride out periods of high volatility, “the long-term outlook appears to be rewarding”.
Three investment trusts specialise in India: Aberdeen New India, Indian Capital Growth and JP Morgan Indian. If the flavour of the country appeals but a lower exposure, Pacific Assets has 33.9 per cent, JP Morgan Emerging Markets 22.1 per cent and Scottish Oriental Smaller Companies 21.1 per cent.
Phil Wong, investment manager at broker Redmayne-Bentley, suggests savers gain exposure through both JP Morgan Indian, which saw a 17.4 per cent rise last year and is trading below asset value, and Alquity Indian SubContinent Fund for an ethical bias. The former favours the financial services and materials sectors.
With Alquity, a quarter of the manager’s fees are donated to the communities in which they invest. The fund also has exposure to the fast-growing economies of Pakistan, Bangladesh and Sri Lanka.
The Indian administration still has work to do, particularly in reducing red tape, notably in curtailing the separate product licensing deals required for each state rather than a federal system. One positive sign is the new Goods and Services Act, akin to our VAT, which will replace a complex and inefficient patchwork of regional state sales taxes in April.
Infrastructure improvements are slow with only 10km of new or improved roads made daily. Agriculture and rural development still accounts for 17 per cent of the GDP and over half employment.
The vast population of 1.3bn has an average age of 27 years. The large number of highly educated, English-speaking graduates attract global firms to relocate functions, notably IT, in India whilst the expanding middle classes are creating opportunities in financial services, property, mobile telephones and consumer goods.
“By 2025, India will have the world’s largest workforce with around two-thirds below the age of 40,” says Jonathan Jackson of Patronus Partners, who likes Aberdeen New India among actively managed funds. It is overweight in consumer staples and materials.
India is less exposed to the potential impact of emerging US protectionism than China, says Jason Hollands at Tilney, advisers to Saga clients, although the country does run a trade surplus with the US. He adds: “Trump’s decision to pull the US out of the Trans-Pacific Partnership may be good news for India which was not a signatory.”
Hollands suggests most investors should gain exposure to India through broader Asian or emerging market funds like Stewart Investors Asia Pacific Leaders with 29 per cent in India.
For specifically India, he tips Jupiter India and JP Morgan Indian Investment Trust. Chelsea Financial Services like Ashburton India Opportunities, launched in 2012 but up 120.6 per cent in three years by comparison with 62.4 per cent for the MSCI India index, and GSAM India Equity Portfolio.
The former invests in under 30 companies which treat minority shareholders well. The latter has a well resourced and experienced team based in India and Singapore.
For a non-Indian specialist, Chelsea tip Matthews Asia Pacific Tiger which holds around one-fifth in the country; Schooling Latter describes it as a “slightly less risky investment choice”.
“India always seems to be the bridesmaid and not the bride,” says Jonathan Baker, investment director at Charles Stanley in Leeds.
He feels that investors may be better served with a “very good UK small cap fund or FTSE tracker over the last 12 months”.
Baker admits that India “may be a better bet than some other developing nations”, noting that it has some very good global brands like Jaguar Land Rover, now owned by the Tata group.
Payne likes JP Morgan Indian, which was launched in 1994. The trust is overweight in financials at 37.5 per cent and light on energy, telecoms and utilities. It keeps outpacing the benchmark index and yet shares are trading at a 10 per cent discount to net asset value with borrowing around seven per cent.
Irish registered Ocean Dial Gateway to India fund also appeals to Payne. Managed by a boutique investment company, it already has a very good track record, returning over 75 per cent since launch in 2012 compared with the 27.2 per cent benchmark. Its top holdings are in Hindustan Petroleum, Ramco Cements and Gujarat Heavy Chemicals.
Hollands advises against using a tracker, saying the Lyxor MCSI India exchange traded fund has been “very significantly outperformed” by all actively managed funds, as well as having high ongoing 0.85 per cent costs for a tracker.
“The concentrated nature of the index is the reason why active managers have done a much better job. The five largest companies House Develop Finance Corporation, Infosys, Reliance Industries, Tata Consultancy and ITC represent over 30 per cent of the index. This is not the best way to capture the opportunities, nor achieve risk diversification.”