A case for India...

Mugunthan Siva

India Avenue

From an investor’s perspective, a strong case can be made for an allocation to Indian equities as part of an investment portfolio. We have put together a white paper on “A case for Indian Equities in a Global portfolio” and summarise our key findings below:

Structural Reasons – A strategic allocation to front-run the MSCI ACWI

  • India’s underlying fundamental tailwinds can be illustrated by its falling dependency ratio (the number of dependents / the number of working age people). As China’s dependency ratio fell (troughing in 2010), it coincided with the strongest phase in its economic growth. India is now making its journey towards its trough.

Source: Statista

  • India’s trend of urbanisation will lead to increasing wealth gains and present opportunity for companies to profit for changing trends. A significant shift towards organised business is underway, which is ideal for India's listed corporates.
  • India’s exports will benefit from an increased focus on manufacturing, global partnerships and the China + 1 strategy adopted by those seeking to diversify their global supply chains.
  • India’s equity markets exhibit low correlation to AUD based assets, making it an attractive inclusion in a global equity portfolio, particularly given the sustainability of its growth. 
  • The digitisation and financialisation of India, initiated by demonetisation is leading to a significant shift towards digital transactions, improving governance and audit trail as well as wealth shifting from physical assets towards financial assets.
  • Local investors are now over 15% and rising of market cap, which is reducing the volatility of equity markets previously at the whims of foreign investors as the incremental traders.

Cyclical Reasons – Why now is a great time to begin

  • The cost of capital has fallen (10-year bonds are 6.22%, cash rates 4%), and this is a lead indicator of the next business cycle commencing in India. During the last cycle (2003-2008), earnings growth was above 20% p.a.
  • India is close to the bottom of its earnings cycle, relative to other regions. Corporates have significant operating leverage to an economic recovery, which is now underway given the country's strong vaccination drive.

Source: Spark Capital

The chart above indicates that India’s profitability is bottom of the cycle at present. Corporate profits are likely to experience a cyclical upswing and be driven by greater contribution from rising private investment, manufacturing and exports in this decade.

However, implementation is mismatched to needs

While investors may acknowledge all of the above, they tend to seek "easy ways" to implement this by looking at low-cost passive or benchmark hugging exposure offered by large investment firms with an Indian equity product as part of a suite of investment products to balance out their stable. However, the Indian equity market has been a rich source of alpha over time. The benefits of this can only be provided by an actively managed exposure, willing to dig more deeply than allocating significantly to heavyweight index consituents. 

Local fund managers in India, as you would expect, are naturally far better at understanding and knowing the local ecosystem as witnessed by their alpha generation relative to global investors investing in India.

“Perceived Safe and Liquid”

On average most multi-product, asset management firms offering an Indian equity product have between 45-55% allocated to the top-10 stocks of India, akin to an Index. Whilst the top-10 companies may make a strong case for inclusion, they aren’t necessarily demanding of half your exposure given that there are over 6,000 listed companies in India. Some of the remaining 5,990 companies are equally dominant in emerging and fast growing addressable markets and are likely to experience far higher level of earnings growth if discovered earlier than when they become significant index constituents. 

That is the true opportunity to an investor seeking capital growth from investing in Indian equities, rather than seeking to not to underperform an irrelevant benchmark.

Why you can’t miss the Livewire Income Series

Livewire’s 2021 Income Series gives investors best in class education and premium content to build a bulletproof income portfolio.

Click here to view the dedicated website, which includes:

  • A list of income-focused ETFs, LICs and funds.
  • Detailed fund profile pages, with data powered by Morningstar.
  • Exclusive interviews with leading fund managers.
  • Videos and articles to help you perfect your income strategy.

........
This document (‘Document’) has been produced by India Avenue Investment Management Limited (‘IAIM’) ABN 38 604 095 954, AFSL 478233 and has been prepared for informational and discussion purposes only. This does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, Information Memorandum or other offer document (collectively ‘Offer Document’) relating to an IAIM financial product or service. A copy of the relevant Offer Document relating to an IAIM product or service may be obtained by writing to us on info@indiaavenueinvest.com or by visiting www.indiaavenueinvest.com. This Document does not constitute a part of any Offer Document issued by IAIM. The information contained in this Document may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of IAIM. Past performance is not necessarily indicative of future results and no person guarantees the performance of any IAIM financial product or service or the amount or timing of any return from it. There can be no assurance that an IAIM financial product or service will achieve any targeted returns, that asset allocations will be met or that an IAIM financial product or service will be able to implement its investment strategy and investment approach or achieve its investment objective.  Statements contained in this Document that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of IAIM. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Document may contain “forward-looking statements”. Actual events or results or the actual performance of an IAIM financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. Nothing contained herein should be construed as granting by implication, or otherwise, any license or right to use any trademark displayed without the written permission of the owner. Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither IAIM or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. None of IAIM or any of its respective officers or employees has made any representation or warranty, express or implied, with respect to the correctness, accuracy, reasonableness or completeness of any of the information contained in this and they expressly disclaim any responsibility or liability therefore. No person, including IAIM has any responsibility to update any of the information provided in this Document. Neither this Document nor the provision of any Offer Document issued by IAIM is, and must not be regarded as, advice or a recommendation or opinion in relation to an IAIM financial product or service, or that an investment in an IAIM financial product or service is suitable for you or any other person. Neither this Document nor any Offer Document issued by IAIM takes into account your investment objectives, financial situation and particular needs. In addition to carefully reading the relevant Offer Document issued by IAIM you should, before deciding whether to invest in an IAIM financial product or service, consider the appropriateness of investing or continuing to invest, having regard to your own objectives, financial situation or needs. IAIM strongly recommends that you obtain independent financial, legal and taxation advice before deciding whether to invest in an IAIM financial product or service.

Mugunthan Siva
Managing Director
India Avenue

Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique investment management company, domiciled in Sydney, with a presence and advisory network in India. He has over 30 years experience in Australia and is lead...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.

Comments

Sign In or Join Free to comment