by Abhinav Mehra, co-portfolio manager of CC Indian Subcontinent Fund
It is believed that the Indian economy is on track to be the third largest in the world by 2027. Its stock exchange is forecast to be among the most valuable by the decade’s end.
That’s a promising outlook for any investor. However, when it comes to allocating assets to the nation, many of today’s India-focused indices and funds are exposed heavily to export focused areas like IT and Pharma as well as global commodities and energy.
It makes sense. Stocks like these have led market returns in India in recent years and for passive investors it may well be the easier route to cover the whole market.
However, we believe this approach fails to fully capture a trend which we consider to be among the most significant drivers of India’s economy going forwards: domestic consumption growth.
According to the IMF, India’s urban per-capita income will increase to $4,700 by 2030 from $2,600 today. As this growing middle class spends more and more, we expect domestically focused stocks to be the market’s biggest outperformers by some distance.
Long-term consumption growth
Domestic consumption is being inflated by a range of factors in India.
On the one hand, there’s demographic influences such as the country’s young and rapidly growing population. But on the other, there are many legislation-based drivers introduced with major reform in mind.
Take the Goods and Services Tax (GST), which came into effect in 2017 to remove the cascading effect of indirect taxes on consumers. Then there’s the root-and-branch clean-up of India’s financial systems, which has improved the performance of private banks greatly and made it easier for individuals to access capital.
The net effect has been a considerable rise in disposable income across a growing middle class. As we all know; greater wealth means greater spending on a wider range of goods and services.
We can easily see the knock-on impact of this by looking at the current strength of the Indian economy. According to the World Bank, the country’s GDP will jump 6.3% in FY23/24, one of the highest rates in the world.
But what’s really exciting for us is that the trend could still be in its nascent stage. Especially with additional support being provided by the sweeping tax cuts recently introduced in the Indian government’s annual budget.
By 2030, the OECD expects 68.4% of India’s population to be classified as “middle class” – more than twice the level it was in 2019. That’s more than a billion individuals representing 83.6% of the country’s spending power.
Naturally, such an outcome is not guaranteed. Forecasts are forecasts. Still, the potential impact of greater spending is nonetheless encouraging.
For example, one analyst puts the compound annual growth rate of non-grocery retail and non-retail consumption in India at 12.2% and 9.4% respectively over the next decade. This would entail a tripling in non-grocery retail spend and a 2.5x increase in non-retail spend to levels of $895bn and $2,710bn respectively.
Strong stocks at attractive valuation
The sectors we believe are set to benefit from increased spending in India are wide-ranging.
They include, but are not limited to mortgages, financial savings, property, travel, tourism, shopping malls, food delivery, cosmetics, e-commerce, insurers, automobiles and travel agents.
Many of these also happen to be the areas that were most heavily penalised by the markets during COVID where prices fell by as much as 50% and, despite a strong post-pandemic lift, many continue to trade at a historical discount.
Many of these consumer facing stocks are net cash, market leading businesses growing at much faster rates than GDP (in some cases growing upwards of 50-60%) and often with little to no competition as the tougher environment in COVID has weeded away weaker competitors.
With rising house savings and credit penetration, post-COVID return to normal via travel, tourism and retail, the emergence (finally) of a new property cycle, and other discretionary categories including domestic consumer facing technology companies, domestic-facing Indian stocks look to have the advantage here.
First-mover advantage
There’s no question that exporters will remain a large part of many Indian equity strategies for some time and especially the more passive ones given their large existing market caps on the basis of which indices set their weights.
Given the long-term demographic and legislative tailwinds, it is equally, if not more, important for such strategies focussed on the long-term future to include high exposure to domestically focused stocks.
