Boasting some of the fastest-growing companies in the world, a population of 1.4 billion and a booming middle class, India has many of the key economic ingredients required to produce impressive stock market returns.
That said, India’s stock market performance over time has been volatile.
Here’s a deeper look at India as an investment proposition and at ways for retail investors to gain exposure to the country.
Note: stock market investing is speculative, not suitable for everyone and can result in partial or total loss of money.
What’s the case for investing in India?
The acronym Bric, denoting Brazil, Russia, India and China, was coined 20 years ago by Jim O’Neill, then chief economist of investment bank Goldman Sachs.
The term acknowledged that the engines driving world growth at the start of the millennium had begun to shift away from mature, developed economies in the West to countries whose power bases had only just started to emerge.
Bric eventually became ‘Brics’ with South Africa making up the quintet.
Although Brics economies have not produced the stellar returns that were expected two decades ago, commentators point to India as the one that remains the most compelling for investors.
Last month, for example, the International Monetary Fund (IMF) singled-out India saying it “deserved to be called a bright spot on an otherwise dark horizon” and describing it as “a fast-growing economy even during these difficult times”.
This was quite a statement given that, just a year earlier, the country had succumbed to a second coronavirus wave that had resulted in India’s death toll swelling to the second largest in the world behind the United States.
Last year, the country overtook the UK to become the world’s fifth largest economy. Given its economic standing, Marcus Weyerer, an investment strategist at Franklin Templeton, says that India is “too big to be ignored by investors”.
He says: “IMF projections extending out to 2027 expect the Indian economy to grow between 6% and 7% each year. That compares very favourably to advanced economies, expected to grow by under 2% each year, and even China, once the world’s growth engine, that’s expected to grow by under 5% annually.
“India may also be able to chip away at China’s position as a leading nation for technology manufacturing. With US-Sino tensions high and growing, and the West’s desire to ‘decouple’ its supply chains from China, India may be one of the countries that benefits.”
Jason Hollands, managing director at Bestinvest, says: “As China has lurched in an increasingly hard-line direction under President Xi, and persisted with its ‘Zero COVID’ policy, India looks set to be a major beneficiary as companies seek to diversify their manufacturing supply chains”.
Why invest in India?
Ben Yearsley, investment director at Shore Financial Planning, says he’s been an investor in India for upwards of 15 years: “It’s a fascinating market with lots of innovative companies. Urbanisation and the growing middle classes, a similar story to other countries across Asia, are key themes. So, too, is the formalisation of the country’s economy as it becomes less rural. This is a big opportunity.”
Bestinvest’s Mr Hollands is also a fan and points to India’s long-term investment prospects: “India has a very compelling demographic profile. It’s also the world’s largest democracy and has an independent judiciary. The average age in India is 28.7 years and almost a third of the population is under 20, which should help drive structural growth for decades.
“In comparison, the average age in China, India’s arch emerging rival, is 38.4 years old. As a result of its disastrous former ‘one child’ policy, China is now staring down the barrel at an ageing population and shrinking workforce, a problem akin to that afflicting Japan.”
Since his election in 2014, India has been led by Prime Minister Narendra Modi who, according to investment manager Schroders, has delivered a series of structural reforms: “He has relaxed foreign direct investment policies and allowed greater foreign investment in several industries, including defence and railways.”
Schroders adds that: “Among the most important reforms enacted over the past eight years are Aadhaar, the world’s largest biometric system, an insolvency and bankruptcy code, and a goods and services tax to replace a complex system of central and state taxes.”
What are the downsides?
Despite its potential, commentators highlight several issues that could make investors think twice before looking to gain exposure to India.
For example, Juliet Schooling Latter, research director at FundCalibre, says that a high oil price is likely to have a detrimental effect on the country’s attractiveness: “The Indian economy is less sensitive to the oil price than it was previously and, over time, this sensitivity will continue to diminish. But a significant and sustained increase in the oil price could create significant headwinds.
“According to the asset manager Alquity, every $10 increase in the price of a barrel of oil would increase India’s trade deficit by 0.4% of gross domestic product. This would be manageable, given India has $573bn of foreign exchange reserves, but would temporarily dent the investment case.”
Ms Schooling Latter also points out that company valuations in India look high: “The Indian stock market always trades on the expensive side, and it looks particularly expensive today. With developed markets now so much cheaper, some may question the need to pay up for India today when they could wait for the market to fall back and invest then instead.”
Rob Burgeman, investment manager at RBC Brewin Dolphin, says that, over the past couple of years, India has benefited from not being in the same situation as China, whose reaction to Covid has been to institute a series of complete lockdowns that have seriously impeded growth in the country.
He adds that both this and Chinese government reforms restricting large companies from operating with the kind of freedoms they had enjoyed before, have resulted in the Chinese market struggling to make any headway.
Generalist Asian funds are required to remain invested in the region and have looked at alternative areas for their investments. But Mr Burgeman warns: “India has been a major beneficiary of this trend and has seen substantial inflows into the equity market. Should the outlook for China improve, we might see the trend reverse.”
How has the Indian stock market performed?
In the last five years, the Indian Sensex Index has risen by 70.5% in sterling terms. Mr Burgeman says there is potential for further growth: “With a stable government, albeit one that has become more nationalist and one that remains somewhat profligate with its spending, there are still some very interesting opportunities in the country.”
Franklin Templeton’s Marcus Weyerer says: “As is the case with most investments in emerging markets, volatility can be heightened compared to developed markets. The currency exposure to the Indian Rupee is another risk factor that can have a significant positive or negative impact on the returns achieved in sterling.”
What are the options for investing in India?
FundCalibre’s Juliet Schooling Latter says: “India benefits from a very deep stock market with over 4,400 listed companies. What’s more, it is relatively uncorrelated to the Chinese market. This means investing in India has the advantage of acting as a diversifier to overall Asian and emerging market exposure, which is typically dominated by China.”
RBC Brewin Dolphin’s Rob Burgeman: “Like China, companies that operate in India can find themselves subject to the vagaries of central and state governments, but these tend to apply more to foreign companies doing business in the country than to Indian companies themselves.
“There is a distinct trend and desire to see foreign companies who wish to operate in India to do so via local partners – and hence remain under Indian control – rather than to operate independently and free of central interference.”
Mr Burgeman goes on to raise an important point for would-be investors: “Foreign investors are unable to buy shares directly in India. So, for most investors, funds are the best route to take.”
Funds to consider
Bestinvest’s Jason Hollands says: “I’m enthusiastic about India, but it is important to recognise that Indian equities – as measured by their market capitalisation, or size – are still a small component of the global equities universe.”
Mr Hollands says India is a concentrated market “with the largest companies being Reliance Industries, Infosys, ICICI Bank, Housing Development Financial Corporation and Tata Consultancy”.
Because of this, he says he prefers funds that explore firms with smaller market capitalisation: “Investors wanting a pure-play India fund might consider the Ashoka India Equity Investment Trust which is managed by White Oak Capital Partners, headed up by Prashant Khemka, who formerly managed Indian equities at Goldman Sachs.”
But Mr Hollands argues that most investors should get their exposure to India via broader emerging market or Asian equity funds: “One of our top picks is the Aubrey Global Emerging Markets Opportunities fund, which focuses on the growth of the emerging market consumer as a core theme. The fund currently has 42% invested in Indian stocks including Varan Beverages, which bottles and distributes drinks, including for PepsiCo, and financial services firm Bajaj Finance.”
Check weightings
When looking to gain exposure in this region, Shore’s Ben Yearsley says it’s important that investors watch out for potentially ‘doubling up’ on their holdings: “Many emerging markets funds have a large Indian weighting, as do some more general Asian funds. Therefore, if you already have exposure to either of these types of fund in your portfolio, check how they are weighted in terms of their country allocation before going on to buy a specific country fund such as India.”
FundCalibre’s Juliet Schooling Latter highlights a handful of fund options: “The Goldman Sachs India Equity Portfolio aims to capture the growth potential of the Indian economy. It is focused on investing in sound businesses of all sizes. Company meetings are a crucial part of the process, and the team’s ability to meet companies on the ground in India differentiates it from many in its peer group.”
Another fund on her ‘buy’ list is Alquity Indian Subcontinent: “This is a high conviction fund focused on tapping into the strong domestic Indian equity market. It invests in companies lower down the market cap spectrum which other investors often overlook and is therefore towards the top of the risk spectrum. It has, however, rewarded those who believe in the Indian success story over the longer term.”
Ms Schooling Latter also points to the Stewart Investors Asia Pacific Leaders Sustainability fund. “This fund invests in the shares of large and medium-sized companies that are either based in, or have significant operations, in the Asia Pacific region. Specific consideration is given to companies that are positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate. Nearly half the portfolio, 48.7%, is currently invested in Indian equities.”
How do I buy funds?
You can buy funds directly from a fund provider, or purchase holdings via an online investing platform, trading app, or through a financial advisor.
Pay special attention to fund charges and administration fees, as these will ultimately bite into the performance of any investments that you make.
