The U.S. market tends to receive the lion’s share of investor attention – the S&P 500 is up 55 per cent over the last five years – but it’s not the only market that has seen stocks soar. Since October 2013, India’s Nifty 50 and Sensex indexes are up 67 per cent and 65 per cent respectively, possibly making many emerging market investors a lot of money in the process.
This year hasn’t been as rosy for Indian equities – from May 1 to November 1 the Sensex has fallen by about 0.5 per cent, while the Nifty 50 is down 1.5 per cent, compared to a nearly 4 per cent gain for the S&P 500 – it may be only a matter of time until the country’s markets rebound. “This is a long-term story,” says Christine Tan, Portfolio Manager at Sun Life Global Investments. “India’s the next China.”
If anything, now may be a good time to buy into the market, as stocks are down. India, she says, has a population of about 1.3 billion people. It’s also a young nation, with half its population under age 28. And it is predominantly a rural nation with a gross domestic product of about $1,800 per capita. That is expected to grow as more of India’s population moves into the middle class, she says.
One key difference between China and India is that the latter relied heavily on exports to the United States to fuel its economy – and the two countries are currently embroiled in a trade war – but it’s the people of India who are driving the country’s economy. “The economy is more domestically oriented with about two-thirds oriented toward domestic consumption,” she says.
Reforms reaping rewards
While these factors could lead to stronger GDP growth – the International Monetary Fund expects the country’s GDP to expand by 7.3 per cent in 2018 and 7.5 per cent in 2019 – there are other factors adding fuel to the economic fire as well.
Several pro-business reforms have been passed by Prime Minister Narendra Modi and the Bharatiya Janata Party, including an overhaul of India’s financial and tax systems.
This has sparked a boom in the banking sector, particularly in private banks. As well, India’s retail banking sector has been, and may continue to be, one of the fastest growing retail banking markets in the world, says Sean Harrison, an analyst with GlobalData, a U.K.-based analytics firm.
This is largely due to its rising middle class, with average annual wages in the country increasing by 42 per cent between 2012 and 2017. “The strong growth in lending products among India’s middle class indicates that India is moving firmly in the direction of a consumer-driven economy,” he says, adding that India’s retail banking sector will be the seventh largest in the world by 2021, up from 13th in 2010.
Many of the country’s poorest are starting to open bank accounts, too, which is expected to help them build wealth, thanks to Modi’s reforms and a 2014 pledge to help the country’s citizens open no-frills bank accounts, says Ms. Tan.
Short-term pain, but long-term gain
While the long-term potential is still attractive, India’s markets could still see some ups and downs in the near-term. Rising oil prices, a higher U.S. dollar and increasing interest rates globally could dampen growth in the near term.
Indian consumers and companies will experience rising costs as the emerging market nation is a net commodity importer. Since commodities are traded in U.S. dollars, including oil, the “perfect storm” of higher oil prices and a surging greenback means India will pay more to buy commodities. Faced with heightened inflation, its central bank has gradually increasing interest rates, which is moderating growth.
One concern for some investors may be high stock valuations, with the Sensex trading at close to 18 times 2018 earnings. Ms. Tan is not worried, though, as Indian equities often have higher valuations than other markets. This is because many Indian firms are involved in consumer-focused and technology related industries, both of which have historically shown higher growth, with strong returns on equity and growing cash flows.
For instance, its largest carmaker, Maruti Suzuki, has a price-to-equity ratio of about 25 times. By contrast, General Motors has a PE of seven times. The difference between these two companies is that India’s car manufacturer could have a massive runway for sales growth, as only about 1.8 per cent of India’s population owns a car.
While there are some exchange-traded funds that capture the Indian market, when it comes to a growing economy like India’s, where the winners and losers are still to be determined, active management is often key. For instance, the team managing the Sun Life Excel India Fund often invests in companies that are not included in India’s main indexes.
The team is also always assessing market volatility, and using the opportunity to buy strong assets when prices get depressed – which is what they are doing now. India, she says, is an attractive long-term market that, despite some recent bumps, could continue to provide great opportunities. “It’s important for investors to step back so they can see the big picture,” says Ms. Tan. “India has a huge population with a young demographic that is still earning just a fraction of what we earn and owns a fraction of what we own.”
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