Whether bulls can swim or not is a confusing question (try googling it). However, one thing’s for sure – they definitely crossed some serious ocean miles last year to help the Indian BSE Sensex go up nearly 35% – and plenty are along the way right now too. The Indian stock market story remains one of serious structural, fiscal, and monetary reform anticipation, with the country well placed to perform in the coming years. A Wall Street favorite for investing in 2015, it is a consensus trade (and therefore a bit dangerous, since when everyone loves something, you want to be careful), but current foreign stock investment in India continue to be tiny compared to global counterparts – meaning, in my opinion, there’s room for everyone to have slice of the growth story in the long term. Consider this – today, the top 4 ETFs focused on India together have less than $10 billion dollars under management, compared to over $180 billion in the top S&P 500 ETF alone. Here’s why allocating some of your money into Indian ETFs makes sense:
1. The country has a ton of room to grow:
– Today, half of India’s population is under 25, and by 2020, the average age will be 29 – among the youngest in the world for a G20 economy. Young people spend, and this group is pretty seriously aspirational. By 2025, the middle and upper class will grow to over 55% and spend 3x compared to today, according to the Boston Consulting Group. Therefore, its domestic consumption growth will, within itself, provide a pretty sustainable self-reliant economy.
– Currently, the GDP per capita stands around $4,000, far lower than the world average of over $10,000 and even its peer emerging markets. Its number, in fact, is low enough to be compared to the frontier markets, such as Africa and South-east Asian nations. So, we’re starting on a very low point.
– It’s ranked 142nd out of 191 countries by the World Bank for doing business, and 54th in the global Logistical Performance Index. There’s a ton of room to improve, and fiscal agendas show the awareness of this.
– India accounts for only 7% of MSCI emerging markets index (Example tracker – EEM). While India accounts for around 5% of the world’s total market capitalization, it has a share of the world’s population of around 15%, making an interesting argument for sustained inflows in the years to come as India’s markets become more liquid.
– India’s services sector contributes over 50% of its GDP. The government’s ‘Make In India’ campaign is focusing on it becoming a manufacturing hub – a sector that has underperformed significantly, contributing to about 15% of GDP and 12% of employment, compared to over 25% in emerging market peers. Barron’s data recently stated that India’s carbon emissions per capita are around 1.9 tons per year, compared with China’s 7.2 tons and the world average of 5 tons – combining this with the inevitable needs for a transition into an industrialized nation, democratic nature, and solid relationships with developed countries, including the US, Israel and Japan, it has enough bargaining chips to not ruffle too many feathers on the climate change front.
2. It’s got the leadership to implement the changes:
– PM Narendra Modi and RBI Governor Raghuram Rajan have solid credentials. Modi’s focus on manufacturing, proven track record of implement policies successfully in his home state, and a reform-driven agenda is showing promise that the government is focused on the right issues, according to analysts. In a recent note, Morgan Stanley stated that ‘the pace of reforms is accelerating’, moving forward on land acquisition rules, labor flexibility, and a national taxation system – all previously identified as key foundations for solving the issues noted above.
– Meanwhile, Governor Rajan has delivered on his commitment to tackle inflation (down from over 9% to about 5% during his tenure) and protecting the rupee value in the face of currency wars in international regions. He has also got some fortunate backing with oil prices plummeting by nearly 50% over the past year. The country accounts for less than 1% of the world’s oil reserves but over 4% of consumption – further helping keeping inflation in check. India’s current account deficit has improved to only 2% of GDP – and as a result, put simply, ‘is less dependent on foreign capital’, according to Thornburg’s Lewis Kaufman, interviewed by Barron’s this week. While US interest rates are projected to go up this year, the country is slated to suffer much less from a capital flight than its emerging market peers such as South Africa and Turkey. On the other hand, it also provides a hedge in case the US Fed ends up, in fact, delaying the rate increase. An established Dalal Street advisor told me earlier this year that that his firm expects an 18% annual return over the long term from the Indian markets; so does Morgan Stanley and other institutional smart money.
What this means for you: With the Indian growth story looking pretty real, it’s worth joining the bullish herd on this one because, frankly, it’s still small right now. Plan to park some of your money into funds such as EPI, INDY, or INDA for a long term time horizon and gain from the international exposure and growth story of the world’s largest democracy.
