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Investing in emerging markets brings opportunities as well as risks – there’s massive growth potential but a sizeable degree of uncertainty. That’s especially true of Canadian investments in surging India, with political tensions stemming from Prime Minister Justin Trudeau’s recent public statement accusing India of responsibility for the murder of a Canadian citizen.
Last week, U.S. authorities said their investigation into the alleged plot to kill a Canadian-American Sikh uncovered apparent links to the slaying of that Canadian citizen.
Although Canadian portfolio managers say they have a watchful eye on Canada-India relations, they’re remaining invested in India because of its long-term outlook, which is overwhelmingly favourable.
“Volatility is always a part of being invested in emerging markets,” says Christine Tan, portfolio manager at SLGI Asset Management Inc. in Toronto.
The emerging-market specialist says she’s “not downplaying … the importance and the seriousness” of current tensions, “but it’s something that’s always there” with such allocations in a portfolio.
It’s hard to ignore the rise of India and investment opportunities with the world’s largest population and fastest-growing economy. The International Monetary Fund has forecast 6.3 per cent growth for 2023, compared with 5 per cent predicted for China.
“Despite the rising tensions, when you look at the long-term outlook in India, we think that there’s a multi-year upcycle,” says Regina Chi, vice president and portfolio manager with AGF Investments Inc. in Toronto.
Ms. Chi manages AGF Emerging Markets Fund, in which India represents 12.6 per cent of the portfolio – the fourth-highest concentration. She also manages AGF Emerging Markets ex China Fund, in which India accounts for 15.7 per cent of the portfolio – the third-highest concentration.
These two funds are underweight in India currently because Indian equities are “relatively expensive versus the rest of the emerging-market universe,” Ms. Chi says.
“[India is] a very deep market, it has 1.4 billion people. The depth of the market helps a lot for investors like us to diversify, but you definitely pay a premium for that.”
She looks for buying opportunities anytime there’s a weakness in the market there, supported by valuations.
“We want to make sure that we have investment catalysts to drive returns,” she says.
Companies with ‘very specific drivers’
The AGF funds are “broadly diversified across Indian equities,” Ms. Chi says, in companies she feels have a competitive advantage, strong market share and good management teams.
“These companies have very specific drivers and catalysts that are actually quite independent from what’s happening [globally], but are very specific to India itself,” she says.
They include Varun Beverages Ltd., one of the largest PepsiCo Inc. bottlers outside of the U.S. and the largest within India; Bharti Airtel Ltd., one of the largest private telecommunications operators in the country; and Larsen & Toubro Ltd., an engineering and consulting firm with a healthy balance sheet and strong earnings growth. It is especially a beneficiary of India’s widespread public infrastructure spending.
As for the Indian economy overall, banks have restructured and they’ve been cleaned up and “we’ve seen a sea change in terms of corporate structure and governance,” Ms. Chi adds.
India is also both an ally to the U.S. and a friend to Russia, benefiting from its cheap oil.
“If you think about who the next upcoming driver of global growth really is, it’s India,” says Ms. Tan, who expects to see surges in the country’s gross domestic product (GDP) per capita as well as urbanization rates. That means a coming consumption boom, in addition to demand for all types of infrastructure.
Getting ‘local exposure’
While there are passive exchanged-traded fund opportunities that include a fair bit of India exposure, Ms. Tan prefers to invest in the domestic story.
“We want that really local exposure, like what’s happening in the infrastructure space and telecommunications,” she says. “But we also believe that you need to know those companies and some of the fastest growing businesses might not be the largest mega caps that tend to sit in the highly concentrated large indexes.”
Sun Life Global Investments (Canada) Inc. has a strategic allocation to India representing about 20 per cent of the emerging market bucket within its multi-asset portfolio, such as its Sun Life Granite Managed Solutions.
These are managed actively through a local subadvisor, Aditya Birla Sun Life Asset Management Co. Pte. Ltd., which has extensive experience on the ground in India, she notes. It also offers the standalone retail Sun Life Aditya Birla India Fund, overseen by the same subadvisor.
Ms. Tan notes that while China started out as a manufacturing hub to the world, India has a domestically oriented economy. Indeed, some 60 per cent of its GDP is from domestic consumption.
A “Make in India” initiative has encouraged big manufacturers to invest in plants in exchange for incentives such as tax breaks. Ms. Tan likes the fact the program has been focused on high-value-added sectors such as active pharmaceutical ingredients and drugs, electronics, drones, electric vehicles and solar panels.
“Most of these goods are meant for domestic consumption,” she says, which is unusual for an emerging-market economy and brings a “positive multiplier,” creating jobs in manufacturing as well as in selling items.
“When you manufacture more of what you need domestically, you become more resilient as an economy. You’re less reliant on your neighbours or trade partners,” she says, which means that “India marches a bit more to the beat of its own drum.”
This makes India “an interesting diversifier for a portfolio,” although it’s critical to monitor events as they evolve, such as the current political tensions with Canada, Ms. Tan adds.
“Big picture – it’s a great investment opportunity,” she says. “But, we also have to be aware of the risks, and we are watching it very closely.”
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