Should you invest in India? It's one of the fastest-growing economies but there are risks

24 December 2019

As one of the planet’s fastest growing economies and home of many world-class businesses, India has huge potential for investors. It could be a route to riches – but you need to be aware of the risks

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There’s no denying that India is an attractive investment story. With a population of more than 1.3 billion people and a growing middle class, it can lay claim to being one of the world’s fastest growing economies.

It is also home to thousands of companies, including many world-class businesses operating in a variety of sectors. Among the illustrious names is Tata Motors, which has owned the iconic Jaguar Land Rover for more than a decade.

The fact that India is still only modestly covered by analysts means that many of these stocks receive less attention than they deserve. This presents an opportunity for experienced fund managers to make money for their investors.

Patrick Connolly, a chartered financial planner at Chase de Vere, says its long-term growth story is compelling.

“We’ve seen strong stock market returns and the environment is still positive, with inflation under control and structural reforms taking place,” he says.

These reforms have been driven by Prime Minister Narendra Modi since he came to power five years ago. His re-election for a second term has been welcomed by the market, which sees his victory as offering some degree of security.

“An additional boost will come from a recent cut in tax rates for domestic companies, from 34.9% to 25.2%,” adds Mr Connolly. “This makes India more competitive against China and other Asian countries, which should attract investment and more jobs in manufacturing.”

However, he stresses India is not a guaranteed route to riches. While there have been developments under Modi’s leadership, the story is far from over.

“It’s making significant progress in terms of economic reforms, but there is still much to do,” he points out.

For example, he believes considerable improvements are required to the regulatory framework to alleviate corporate governance concerns, particularly with regards to disclosure and transparency by some companies.

“Major infrastructure issues also need addressing, including transport and energy improvements,” he says. “Despite the perceived stability from Modi’s re-election, there always seems to be the potential for political risks in India.”

While the aforementioned growth of the Indian economy is expected to continue, it’s important to remember that it doesn’t necessarily translate into stock market returns, points out Adrian Lowcock, head of personal investing at Willis Owen.

“The Indian market has always looked expensive relative to its Asian and emerging market peers because some of the future growth is priced into the market,” he says.

He also suggests that as India is a democracy, “it lacks the focus that we have seen in China and it may take longer for fresh reforms to get passed, as well as approving much needed infrastructure projects”.

There are also big risks, such as the prospect of the political policies that Modi wants to introduce causing short-term disruption. Such issues, points out Mr Lowcock, can have a detrimental effect on the stock market.

“As with any emerging market, having exposure to one country can be volatile because the exposure is less diversified and therefore riskier,” he says. He suggests that anyone interested in the country as an investment could consider funds such as Stewart Investors India Subcontinent Sustainability.

“The team evaluates companies by focusing on quality, earnings growth, and valuation,” he says.

Mr Connolly takes a different approach. He believes investors should opt instead for more diversified emerging markets funds, such as JPM Emerging Markets or Fidelity Emerging Markets, both of which have exposure to India.

“The bottom line is that while India undoubtedly has the potential for further economic and stock market growth, there are high risks involved,” he says. “Because of these risks we don’t recommend any specialist Indian funds to our clients.”

If investors are keen on having specific exposure to India, Mr Connolly suggests the best approach is to invest in funds where the managers are based in the country. “A good option could be the recently launched Schroder Indian Equity fund,” he adds.

Looking ahead, Ramesh Mantri, director of investments at White Oak Capital Management, the investment adviser to the Ashoka India Equity Investment Trust, is optimistic for the country’s future. He believes the re-election of the Modi government for a second term provides a positive backdrop for business sentiment and suggests that there is an increased likelihood of further structural reforms over the coming years.

As far as investment opportunities are concerned, Mr Mantri continues to see strong combinations of great businesses at attractive valuations across a variety of sectors, particularly financial services and technology.

“We continue to believe that the structural growth drivers of the Indian economy are deep-rooted,” he says.

“The near-term challenges notwithstanding, India today offers a multi-faceted, multi-generational investment opportunity.” 

Jupiter India

Avinash Vazirani, who has been investing in the Indian equity market for more than two decades, embraces an investment style known as GARP.

This stands for ‘growth at a reasonable price’, which means he prefers to invest on a long-term basis in stocks that are reasonably valued but have plenty of potential.

These companies are also expected to benefit from ongoing changes in India, such as the outsourcing of services by overseas businesses.

The stated aim of the fund is to achieve long-term capital growth by investing primarily in companies operating or residing in India.

However, it may also consider those in Pakistan, Sri Lanka and Bangladesh, as well as companies deriving a significant proportion of business from – or with – India.

The fund currently has 25.3% of assets under management in financials, with 23.7% in consumer goods, 13.8% in healthcare, and 10.6% in oil and gas.

Its 10 largest holdings, meanwhile, include Hindustan Petroleum, HDFC Bank, Gillette India, and Godfrey Phillips India.

Adrian Lowcock, head of personal investing at Willis Owen, likes Vazirani’s strategy of identifying under-researched stocks with strong growth prospects.

However, Mr Lowcock also warns that the fund’s philosophy and investment process means it can experience turbulence.

He adds: “Investors should be aware that, given the unconstrained portfolio and a large exposure to smaller-cap stocks, the fund can go through short periods of underperformance.”

Jupiter – India I Acc Fund from UK Investment Association universe

Value of £100 invested I the fund over five years

Year

2014

2015

2016

2017

2018

Fund movement in year (%)

53.77

12.69

22.76

22.21

-19.9

Value of £100*

153.77

 

173.28

212.72

208.23

*The £100 was invested on 1 Janaury 2014. Source: Moneywise.co.uk

Manager

Avinash Vazirani

Launch date 

February 29 2008

Fund size

£745 million

Minimum initial investment

£500

Minimum additional investment

£250

Initial charge

0%

Performance fee

None

Annual management fee

1.5%

Contact details for retail investors

0800 561 4000

First published on 8 January 2020

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