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To facilitate the needs of this rising middle class, the country has a voracious appetite for infrastructure, from ports and power to housing, roads, rail and high-speed internet connections.ANUSHREE FADNAVIS/Reuters

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One strategy investors can use to build their portfolios is to follow the lead of pension funds. It’s a way to piggyback on fund expertise and resources for long-term gains. By that measure, India is the place to be.

In September, the Ontario Teachers Pension Plan (OTPP) became the latest Canadian pension plan to open an office in India. The OTPP ranks 18th in the global top 20 with $242.5-billion in assets. It recently opened an office in Mumbai and expects India will account for up to 10 per cent of its assets in the next 15 to 20 years. The pension plan is eying public and private equity, real estate, infrastructure, health care and renewable energy investments.

The OTTP is following the lead of the Canada Pension Plan Investment Board (CPPIB), which invests on behalf of the Canada Pension Plan. The CPPIB is the 8th largest global pension plan with $523-billion in assets and opened a Mumbai office in 2015. It aims to have a third of its assets in emerging markets by 2025, of which India is a major component.

Despite short-term challenges, the funds are after India’s potential, which is 1.37 billion people with rising incomes, two-thirds of whom are under the age of 36. To facilitate the needs of this rising middle class, the country has a voracious appetite for infrastructure, from ports and power to housing, roads, rail and high-speed internet connections.

Should small investors follow these funds? Yes, analysts say, as long as they’re patient, have a long-term horizon, and can live with the volatility that sees India’s economy move in fits and starts.

“India is where China was 10 years ago,” says Sadiq Adatia, chief investment officer at BMO Global Asset Management (BMO GAM) in Toronto. “If you think about where longer-term growth is going to be, where the population growth is, it’s definitely emerging markets.”

Emerging market specialist Christine Tan, assistant vice president and portfolio manager with SLGI Asset Management Inc. in Toronto, is equally optimistic.

“The longer-term factors haven’t changed,” she says. “India has the largest young population in the world. Gross domestic product (GDP) per capita is a fraction of where it could be, so it wouldn’t take much for that economy to double in size.”

India’s central bank rate sits at 5.9 per cent to help tame inflation, which is sitting at 7 per cent. Both numbers are high, but near normal in an economy in which the Reserve Bank of India likes to keep inflation between 2 and 6 per cent. India’s GDP should be near 7 per cent for the year.

India’s stock market has also performed better than developed markets this year. The MSCI India Index, a broad measure of Indian stocks comparable to the S&P 500, was down 3 per cent this year to Oct. 17 in Canadian dollar terms. The S&P 500 was down 24 per cent in the same time period in Canadian dollar terms.

Mr. Adatia says while developed economies injected billions of dollars of stimulus to counter the pandemic, India couldn’t afford to do that. So, share prices rose less and have fallen less this year. Even so, both analysts think valuations are high relative to the shocks on the way. A big one is energy prices as India imports 85 per cent of its oil.

“Short term, be cautious. It really depends on how comfortable you are with an adjustment to the multiples,” Ms. Tan says.

Venture capital going to domestic demand

She points to rising levels of venture capital investment in India as a sign the domestic economy is on the move.

Citing Bain & Co. research, she says venture capital inflows hit US$38-billion in 2021. While that’s small relative to global activity, it’s meaningful because of the amount and where the money is going. Much of the money was aimed at startups focused on domestic demand rather than exports. That indicates a strongly growing middle class.

She says 44 unicorns – companies with valuations greater than US$1-billion – were launched last year. They included e-commerce and payment systems, and other financial tech areas, which benefit from India’s one-billion telecom subscribers, who have access to relatively inexpensive data and voice plans.

Both BMO GAM and SLGI market India funds. The passively managed BMO India Equity Index ETF ZID-T has $94-million in assets under management (AUM) and tracks the performance of 40 Indian stocks. Half the fund is weighted to information technology (30 per cent) and financials (20 per cent).

Sun Life Aditya Birla India Fund, with $154.3-million AUM, is an actively managed mutual fund. Financials and IT also account for half the holdings, atthough the weightings are reversed with financials at 36 per cent and IT at 14 per cent.

“Emerging markets offer a strong investment opportunity with India, in particular, getting to a stage at which their own consumers are fuelling the economy,” says Mr. Adatia, who was chief investment officer at SLGI before joining BMO GAM. “The opportunities are there, you just have to find the right areas.”

That’s a similar sentiment to OTPP chief executive officer Jo Taylor, who noted in an interview in September that India’s need for infrastructure is where OTPP can play a role.

“It has a large, growing, and dynamic economy with openness to foreign capital, which makes it a strategically important market for us,” he said.

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.

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