Conal Gregory: Why investing in India could lead to magnificent returns

>Why it's wise to AIM for the smaller companies

The opportunities over the medium to long term continue to look exciting for the fastest growing major economy in the world with its GDP forecast to be 7.3 per cent this year and 7.5 per cent in 2020. By comparison, the IMF expects the world economy to advance 3.2 per cent in 2019 and the UK by just 1.3 per cent.The economy is underpinned by its very attractive demographic profile and in the median term supported by stable governance under Narendra Modi’s Bharatiya Janata Party which has been elected for an historic second term with a landslide victory. That opens the way for further structural reforms.Unlike China which has a declining and ageing population, India has a young and growing workforce with an average age of 27 years. Whilst it has considerable social inequalities, the middle class is rapidly developing and proving a powerful force for rising consumption.The World Economic Forum forecasts that private consumption will increase from US$1.5 trillion to $6 trillion by 2030, making India the third largest consumer market after the US and China.Detractors point to the dichotomy of India accepting £98m annually in aid from the UK whilst Modi peruses vanity projects like last month’s launch of a rocket to the moon.Since Modi was first elected in 2014, meaningful reforms have replaced gridlock and instability. This has included overhauling the bankruptcy code, speeding up procedures to gain construction permits, permitting foreign ownership more and replacing regional sales taxes across 29 states with one national Goods & Service Tax.

India has rolled out the world’s largest biometric identification system, migrated various government services online and connected rural areas with high-speed internet networks. This has resulted in hundreds of millions of new bank accounts, reducing bureaucracy and improving financial inclusion.Modi has much still to do, notably in job creation, which is a priority for his second term. The higher tax revenues have allowed infrastructure to be boosted by a $1.44 trillion programme to bring metro trains to 50 cities and double the national highway, as well as to give far more money to healthcare.Unlike most other emerging markets, India is far less exposed to global trade uncertainties apart from energy where higher oil prices will act as a brake on growth. Last year the rupee suffered from a strengthening US dollar, rising oil prices and a widening current account deficit.Stock market valuations are quite high by comparison with other developing countries but this premium reflects the potential. Yet India is the sixth largest economy by GDP and has the second highest population in the world. For investors, the focus is on capital growth rather than dividend income. It is sensible to think in terms of holding for at least five years and ideally a decade plus, making funds appealing for children and building up pension pots.“India is a market where active management is appropriate from both a risk and reward perspective as the main indices are very concentrated on a small number of conglomerates,” says an enthusiastic Jason Hollands of Tilney Investment Management.The MSCI India Index – which is followed by trackers like iShares – has 78 constituents but 21 per cent is held in two businesses: Housing DevelopmentCorporation and Reliance Industries.Instead, Hollands says exposure should be through a broader emerging market fund (like Stewart Investors Asia Pacific Leaders or JP Morgan EmergingMarkets Investment Trust with 34 and 21 per cent in India) or, for higher risk, a specific Indian fund. He tips Aberdeen New India Investment Trust which holds 42 companies or, for those with “much higher tolerance of risk”, Alquity Indian Subcontinent.

The latter takes a truly multi-cap approach with most money in small and medium-sized Indian businesses. Adam Martell, Investment Manager at Charles Stanley, likes funds whose managers engage with companies like Infosys (multinational technology consultants) and Hero Motocorp (New Delhi based motorcycle and scooter manufacturer).

He tips Aberdeen New India, which can be bought at a discount to net asset value, and for broader exposure, the Halo Asian Consumer Growth fund which holds 12.1 per cent in India. The former underperformed last year as it had insufficient energy stocks, omitting the key conglomerate Reliance Industries.It is heavily into financials, consumer staples and IT. Aberdeen New India is also the choice of Rebecca O’Keeffe at Interactive Investor, who warns that India is “not for the faint hearted” but as an investment trust, her choice does not have to worry having to sell stock to meet redemptions.

If looking regionally, she likes JP Morgan Emerging Markets and Fidelity Asia with 21 and 14 per cent assets respectively in India.Martin Payne, Senior Investment Manager at Brewin Dolphin in Leeds, notes that 10m join the workforce each year. He says bank defaults are a risk and favours two funds: JP Morgan Indian Investment Trust and Jupiter India.

The former’s overweight position in financials and underweight in healthcare and IT have boosted its performance. The Jupiter one favours small and mid-cap firms including InterGlobe Aviation, SpiceJet and Procter & Gamble Hygiene.Carolyn Black at Myddleton Croft Investment Managers in Leeds says India’s economy is resilient with stable inflation and interest rates. She has spotted a likely slowdown in industrial growth and notes that some commentators predict a financial crisis where interest rates rise in the search for capital.Yet “India’s listed companies have become more innovative with fintech a real growth area,” notes Black who says its bond market is still under-developed despite being one of the largest among emerging nations.India is “a compelling long-term growth story” but share prices have risen considerably, combined with major infrastructure issues, says Kelly Kirby of advisors Chase de Vere. This means that on balance, Kirby prefers not to recommend any country funds but instead suggests savers gain exposure through more broad-based and diversified emerging market collectives.India’s Government is “pro-business”, says Thomas Rosser at The Share Centre, who opts for funds rather than individual companies to reduce risk and gain diversification. He selects three which “have the potential to capture some of the opportunities India exhibits over the long term”:

Stewart Investors Indian Subcontinent, Fidelity India and Aberdeen Standard Indian Equity. All three emphasise quality. The first has experienced co-managers, backed by a solid research team, and much lower volatility than its peer group. Fidelity

India is slightly more defensive than its comparative index whilst the third fund seeks above average return and lower debt. The first two funds are also recommended by Adrian Lowcock of advisors Willis Owen. He says Jupiter India seeks under-researched stocks with strong growth prospects but as this means a large exposure to smaller-cap firms can mean short periods of underperformance.Saul Fulda at Redmayne Bentley likes T. Rowe Price Asian Opportunities and Genesis Emerging Markets with over 13 and 10 per cent in India. For a more focused fund, Jupiter India is his choice but he warns that “the country remains an unstable and risky environment.”Juliet Schooling Latter at FundCalibre, a noted successful stock picker, says that India’s stock market volatility makes it “only really suitable for investors with stronger risk appetites”. For the long term, her favourite funds are Goldman Sachs India Equity and IIFL India Equity Opportunities.