By Tatsuya Suzuki, chief portfolio manager of SuMi Trust’s Japan Quality Growth Strategy
India is now the most populous country in the world. With its current growth rate it is soon forecast to stand alongside the US and China as one of the world’s largest economies. In theory it should be very attractive to growth investors, but there are barriers to entry.
With potentially high rewards also comes high risk; Indian companies do not benefit from the same standards of corporate governance as many developed countries. Relative political and economic instability deters foreign investors from parting with their money, whilst corporate corruption and embezzlement is believed to be more common than in the US, Europe or Japan.
However, change in India is afoot. A raft of new regulations culminated in the Securities and Exchange Board forming the Committee on Corporate Governance in 2017. Greater regulatory oversight, combined with international pressure to improve diversity, has ushered in an era of change for Indian corporates. These businesses are making significant headway, but for many investors the risks still outweigh the benefits.
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So, why not invest in the best of both worlds: businesses domiciled in developed nations that are set to benefit from growth in India. This way, concerns over corporate governance need not deter investors from tapping into the rapid growth on offer in developing economies like India. Japan, as it happens, hosts a number of these companies.
Air conditioning (AC) units represent a substantial opportunity for manufacturers selling their systems in the global south. India, with a booming middle class, rapidly increasing GDP per capita and a hot, tropical climate, is the perfect target market for producers of AC units. As disposable income increases, demand for AC systems grows proportionately, as seen in China in the 2000’s. According to the IEA, fewer than 10% of Indian households are currently fitted with air conditioning. In China, rates are over 60%; in Japan, they are over 90%. Hence, the IEA estimates that AC installation in India will increase tenfold, from 26.6mn units in 2016 to 277mn units in 2031.
One company poised to benefit from the forecast growth in this market is Daikin Industries; the Japanese manufacturer of AC units has already made significant inroads in the Indian market. After a decade of business in India, Daikin now has the largest market share in the domestic and commercial AC markets. The Indian government has recently introduced new regulations to require greater energy efficiency in electronic goods. This will serve as a tailwind for Daikin, as its product boasts better energy efficiency than that of competitors.
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India’s media and entertainment market is expected to expand in tandem with income growth. Forecasts predict the market to double in size by 2030, from $28bn to $60bn. The gaming and subscriptions sub-sectors are expected to post the fastest growth. Sony Group, the Japanese electronic goods producer, is poised to take advantage of this growth market. Sony’s diversified offering, covering the whole media and entertainment market, means the business is well positioned to grow as the Indian media and entertainment market takes off, even if growth in any one sub-sector is sluggish. Kenichiro Yoshida, CEO of Sony, made his commitment to expanding in the Indian market abundantly clear at a corporate strategy meeting in May 2023.
Now, it is true that Japan’s own road to improving ESG standards and creating a business environment appealing to foreign money has not been straightforward. Japan has long been considered a laggard when it comes to corporate governance, and the country still has some distance to travel; female representation on boards of listed companies and numbers of independent directors still lag behind figures in Europe and the US.
However, rapid change spurred by the introduction of the TSE’s Corporate Governance Code in 2015 – and subsequent revisions in 2018 and 2021 – has gone some way to earning the confidence of foreign investors. As the Nikkei booms and the world once again turns an eye to Japanese equities, the observant will see that corporate governance has come on leaps and bounds from the opaque management systems of yesteryear.
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India is at a crossroads on its way to becoming a global economic superpower. While already posting growth at a rate that would turn any Western economy green with envy, growth still stands to accelerate over the coming years, as the economy ramps up into its ‘take off’ stage. A steadily growing appetite for comfort and luxury makes the Indian middle class a perfect target for Japanese manufacturers. For investors who are excited about the growth potential in India but wary of investing directly, Japanese equities poised to tap in to Indian growth present an alternative.
