Equities

Vikas Pershad: What investing in India over 20 years has taught me

9 min read 16 Oct 24

Marketing communication

Vikas Pershad
India Portfolio Manager, Asia Pacific Equities Team

The combined economies of India and China accounted for two-thirds of global production 250 years ago.

By 1950, however, India’s share of world income stood at just 3%. Today, India is the world’s most populous democracy, third-largest economy by purchasing power parity and fourth-largest equity market, re-establishing its status as a global economic force. Its diverse and rapidly growing economy, bolstered by a strong domestic market and strategic geopolitical position, is reshaping the global economic landscape.

On a day-to-day view what could all of this mean for investors? India is the busiest initial public offering (IPO) market in the world with 6,000 listed companies and approximately 2,000 with a market capitalisation in excess of $100 million. This translates to a broad and deep investment opportunity set, which, we believe allows for active managers to outperform due to the dispersion within these companies. There’s also various gradations of quality of investment when it comes to management teams and business models, which make it fertile ground for the long-term investor.

India’s mantle as the best-performing market in the world for the last two decades will inevitably attract scepticism around whether that can continue – but we’ve been hearing the same argument for almost 20 years and in rupee terms or in dollar terms, it’s better than any market in the world, in our view. Only the US comes close, but it has experienced a concentrated rally driven by large tech and trillions of dollars of market cap created by a small handful of companies. Meanwhile in India, the rally has been broader based – and we expect that to widen and lengthen.

The feeling on the ground is that the historical place that India once had as one of the two largest economies in the world is its rightful status, and the prime minister and subsequent administrations will pull and push on the levers as necessary until it gets there. Today, India is the world’s fastest-growing major economy, averaging 8.3% growth over a three-year period¹.

I’ve been investing in India for over twenty years. In that time, stability has come to the government, the economy has continued to grow at a high rate (even on a much higher base than where it once was), and most companies have gone through a revolution in how they treat minority shareholders.

From a top-down perspective, the direct result is clear to me: the country’s listed market cap has increased by tenfold. I’ve also seen evident changes on a bottom-up basis and this comes through in every interaction in India: the collective intelligence of management teams is higher, signalled by more thoughtful capital allocation; the focus on investing in and growing in India, rather than on creating global empires, is readily apparent; and the excitement to participate in India’s growth story is palpable among executives and investors alike. In a capital market context, this is no longer an emerging market. India has emerged.

How is modern India transforming?

On an international level, both the US and European Union (EU) view India as a strategic partner in the Indo-Pacific region, with shared democratic values and mutual interests in security and economic growth.

Washington D.C. could seek to enhance trade relations with India by negotiating bilateral trade agreements that address issues such as tariffs, market access, and intellectual property rights. The growing Indian middle class presents significant opportunities for American exporters in sectors like technology, defence, and consumer goods.

The long-term reactions from Brussels are likely to focus on negotiating a comprehensive trade and investment agreement with India to facilitate greater economic integration. Such an agreement would address trade barriers, regulatory cooperation, and sustainable development.

India’s the world’s fastest-growing major economy, averaging 8.3% growth over a three-year period

Domestically, India’s economic structure is characterised by a mix of agriculture, industry and services. The services sector, including information technology, telecommunications, and financial services, is a major driver of growth, contributing over 50% of GDP. Agriculture remains crucial, employing a significant portion of the workforce and ensuring food security.

Much of India’s untapped potential lies in its demographic dividend, yet just 36%² of India’s population lives in urban areas despite having the largest young population in the world. Both economic growth and urbanisation will be driven by India’s ability to incorporate this cohort – as well as more women – into the workforce.

The rise of the consumer and the manufacturing sector simultaneously could create substantial economic growth. That, in turn should give rise to a rich vein of investment prospects. Notwithstanding the opportunities, one must also be mindful of the hurdles that need to be overcome, from addressing infrastructure gaps and managing urbanisation to investing in education and skills in order to reap the demographic dividend by ensuring the workforce is equipped for the demands of a changing economy.

A key driver of India’s economic resilience and global competitiveness can be attributed to its domestic market, boasting a population in excess of 1.4 billion people. This offers both a vast and diverse consumer base. The growing middle class and increasing disposable incomes are driving demand for a wide range of goods and services – from education to healthcare, premium foods and appliances. This isn’t a one-year or five-year phenomenon, but one which we believe will play out over a number of decades.

The rapid adoption of digital technologies, including mobile internet and digital payments, is transforming India by giving more people a chance to participate in its economic growth story and creating new opportunities for businesses. The government’s ‘Digital India’ initiative aims to harness technology for inclusive growth. India’s start-up ecosystem is thriving, with entrepreneurs driving innovation in sectors like e-commerce, fintech, and health tech.

The government’s support for startups through initiatives like ‘Startup India’ is looking to foster a culture of entrepreneurship. For public market investors, this translates into an opportunity set that is broader and deeper by the year.

We believe that US companies are likely to increase investment in India’s technology, healthcare, and renewable energy sectors. Collaboration in research and development, particularly in areas like artificial intelligence (AI) and clean energy, will surely be pivotal. With India’s emphasis on digital transformation and innovation, the EU is also expected to deepen cooperation in technology, cybersecurity, and data governance, leveraging India’s strengths in IT and software services.

Long tails to growth

To reap the dividends of a large and young population (40% of India’s population are under 25 years old³), many of whom are English-speaking and can be absorbed into companies rapidly, employment is an essential component to boost economic growth.

Manufacturing , supported by the ‘Make in India’ initiative, is gaining momentum, with a focus on increasing the sector’s GDP share, creating jobs and diversifying global supply chains.

We believe that this focus on increasing production in India combined with global geopolitical dynamics supporting supply chain diversification towards the country underpin the trend of key sectors seeing long tails to growth.

A great example of this is the scale of iPhones being manufactured in India – almost 14% or $14 billion in the last fiscal year⁴, double the previous year and counting. It’s also feeding into a domestic market where more people want these handsets. Meanwhile, the government is telling companies that if they want to sell in India to Indians, then things have to be made by Indians in India – and we’re also a great export hub.

India is the busiest IPO market in the world with 6,000 listed companies and approximately 2,000 with a market capitalisation in excess of $100 million.

Shrinking the import bill

After oil, India’s second-largest import bill is on electronic components. Today, research finds that for every $2 spent on oil, $1 is spent on the electronic components – a large number that’s growing quickly.

While oil is harder to circumvent, the government has its sights set on shrinking that large import bill on electronic components as quickly as possible.

As a result, we’ve seen Indian electronic manufacturing services companies (EMS) go vertical over the last three years, particularly over the last 18 months, and our view is that’s a long tail of opportunity to continue tapping into. We’ve seen this phenomenon of diversification play out repeatedly as people moved away from the US 40 years ago to Japan, followed by South Korea, Taiwan and China – and we believe it’s only a matter of time before they make their way to India. That’s why we’re putting capital there.

Electronic components feed into higher-end appliances from consumer devices to automotives, and the latter is a sector that we have exposure to. In the financial year 2023-24, passenger vehicle sales topped four million in India⁵. While the penetration rate compared to China is still low (27 million units per year⁶), if the acceleration continues as is, it won’t be long before these rates catch up in what is now the most populous country on the planet.

When this is taken into account along with the rising middle class and our approach of daily portfolio buying, we see opportunities in the automotive sector. In the last three years, we’ve moved our exposure around, starting off much more heavily positioned in four wheelers, then two wheelers, and now commercial vehicles. But we also have a lot more exposure to the components industry in India than we had just a year ago – and that’s a very long tail to growth. Again, that’s one cluster: components, appliances, automotives and parts.

Investing in India: expensive or cheap?

We’ve been hearing that India is the most expensive market in the world over the last 20, 15, 10 and five years. We actually think it’s been the cheapest market in the world.

Why? Because it’s been trading at the highest discount to intrinsic value, which is why it continues to do well. If the market were close to close today, globally, India would be the only one to be up nine consecutive years and last year was the only one to have been up eight consecutive years.

A lot of the companies and sectors that we invest in are GDP multiplier growth sectors that are seeing margin expansion, so earnings should grow even faster and that could continue for a long time – and companies have become much smarter about investing for the long-term. This might be the biggest change I’ve seen over the last 20 years.

While India’s stock market value exceeds $5 trillion⁷, for the long-term investor I believe that it’s one of the most exciting markets in the world, if not one of the cheapest still.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.