Just over a year ago, India was seen as the go-to place for investors looking for long-term growth in a late cycle economy, with the International Monetary Fund projecting India to be the fastest growing economy in 2020 and 2021.
But 2019 turned out to be a challenging year for the country, with election uncertainty and a cyclical slowdown in the domestic economy, as a liquidity shortage – caused by a crisis in the shadow banking sector – hit economic growth. At the end of the year, the MSCI India was up only 3.65%, compared to 21.63% for the MSCI World and 13.84% for the MSCI Emerging Markets*.
In recent years, India has been benefitting from structural and economic change – courtesy of pro-business prime minister Narendra Modi and the ruling Bharatiya Janata Party (BJP). Since Modi came into power in 2014, business has largely gone from strength to strength and, importantly from an investment point of view, the ease with which businesses can operate there is transforming.
Reforms included the Goods and Services Tax, inflation targeting and the Indian Bankruptcy code. He has much more to work on however – with labour laws, infrastructure, minimum wages and the Indian retail market all on the agenda since his re-election last year. In the aftermath of his win, the Indian government announced a significant cut in corporate tax rates from an effective rate of 34% to roughly 25%, with additional cuts for manufacturing companies to 15%.
How has Covid-19 hit the Indian economy?
As with so many other countries, the impact of the coronavirus has raised market concerns about demand destruction in India, owing to the impact from the lockdown, and the prospect of a significant near-term hit to economic growth.
At the time of writing, India has some 82,103 cases and 2,649 deaths from the disease – with the country in lockdown since March**. Modi has already announced measures worth $266bn to meet the challenge of the pandemic: fiscal and monetary stimulus equivalent to about 10% of the annual output of India’s economy. The Ministry of Labour has also written to all formal sector companies asking them not to lay off workers in a bid to offer further support.
The Reserve Bank of India (RBI) has also decided to decrease the reverse repo rate (when a central bank borrows money from commercial banks within the country), by 25 basis points to 3.75% to further loosen domestic monetary conditions and to boost economic activity.
The long-term story remains as strong as ever
India is likely to see a multi-decade low in terms of growth this year (in April the IMF predicted it would fall to 1.9% in 2020 due to the recession). However, the important fact is the IMF believes that, alongside China, India will be the only major economy to see any sort of growth in 2020.
What will help the economy is the fall in the oil price. India is the third largest importer of oil globally. For every $10 per barrel fall in prices, India saves more than 1 trillion rupees ($130bn), which is equivalent to 0.5% of GDP^.
Ultimately, I would argue the long-term case for India is still compelling and that is reflected by the overweight we have in our managed portfolios. More than 50% of the population is under 25 years of age, with 1m new people entering the workforce each month – those demographics are impossible to ignore in terms of future growth.
Investors may want to consider the likes of the Goldman Sachs India Equity Portfolio as an “all weather” offering, with manager Hiren Dasani and his team having a long-term time horizon and low portfolio turnover. Another to consider is IIFL India Equity Opportunities, a high conviction strategy of 20-30 stocks which prioritises companies treating investors properly.
Those who prefer a broader Asian equity fund may want to consider the Stewart Investors Asia Pacific Leaders fund, which has 30.3% of the fund invested in India, including five top 10 holdings^^. T. Rowe Asian Opportunities Equity fund, is another option with an overweight to India (12.6% of the portfolio^^), as is Fidelity Asia Pacific Opportunities fund, with a 9.1% weighting^^^. All three funds have high-conviction holdings.
*Source: FE Analytics, total returns in sterling, 2 January 2019 to 31 December 2019
**Source: Worldometer, 15 May 2020
^Source: Schroders: What does Covid-19 mean for India
^^Source: Provider factsheet at 31 March 2020
^^Source: Provider factsheet at 30 April 2020
