01/08/08 India going from strength to strength
Country's domestic strength offers rewards for investors. Cherry Reynard reports
With all eyes on the elections in its volatile neighbour Pakistan, it is easy to overlook the quieter investment success story of India.
Last year, burgeoning consumer spending and much-needed infrastructure growth helped the Morgan Stanley Countries' Index (MSCI) India deliver a 71pc return, the highest of any major Asian market.
This year, the economic news has remained buoyant, supporting claims that India's domestic strength insulates it against world economic turmoil. But investors' waning appetite for risk has sliced 14pc off the Indian stock market since January 1.
Does the Indian growth story still hold strong? And if so, does recent weakness represent a buying opportunity for investors?
Perhaps the most important factor India has on its side is demographics.
According to Avinash Vazirani, manager of the Jupiter India fund, India has the ideal demographic, with lots of young people supporting relatively few older ones. He said that India is home to around quarter of the world's under-25s, with 60pc of India's population aged under 30.
Much of the booming service sector has been built on this young, well-educated, English-speaking population. The service sector now accounts for around 50pc of gross domestic product (GDP) and, despite the irritation of some British consumers, the trend for outsourcing to India shows no signs of slowing.
Mr Vazirani said: "A recent McKinsey report suggests that the middle class of around 13m will rise to 140m by 2025. This is a consuming population, who are buying domestic goods and services and creating more jobs. It's a virtuous circle." Some consumer goods sectors have seen spectacular levels of growth.
The most obvious is in mobile telephony, where subscribers are growing at a rate of around 7.5m per month. In general, it is domestic companies supplying these services. Sam Mahtani, director of emerging market equity at F&C, said that at the higher end, strong growth is being seen in branded goods, consumer electronics and cars, while at the lower end, it is simpler things like toothpaste.
Despite these positive trends, penetration of consumer goods is still small, leaving room for expansion. Vijay Tohani, manager of the First State India Sub-Continent fund, said: "There are only around 16 credit cards, eight cars and four internet connections per 1,000 of population". The other big driver has been infrastructure growth.
Mr Tohani said: "Historically, infrastructure has always been the Achilles' heel of India, now it is being seen as an investment opportunity. The government has earmarked between $400bn and $450bn to spend on infrastructure."
The strength of this internal demand also means that the economy is not as reliant on exports - and therefore the world economic climate - as some other major emerging markets. Mr Tohani said: "Only a small percentage of GDP - about 13pc - is export-driven.
This means that India will keep growing even if the world economy falters." All these factors have helped generate India's robust GDP growth of around 9pc per year, marginally below China, but above that of Russia and Brazil. If that could be maintained, India would be on course to become the world's second largest economy after China within 30 years.
While that may seem improbable, Arun Mehra, manager of Fidelity's India Focus fund, said he is confident that the Indian economy can continue to grow at between 7pc and 8pc a year for at least the next five years. The stock market has also broadened out. Mr Mehra said that 15 years ago there were only 40 companies, which were large and liquid enough for investment. Now the relevant universe is 900 stocks, with plenty of new sectors such as media, infrastructure and property.
This has been expanded by government privatisations and other flotations. Not all of these have gone to plan, however, and shares in Reliance Power dropped sharply after its $3bn flotation early last month. But it is difficult to ignore the fact that the Indian market now trades at a substantial premium to other emerging markets.
Vinay Gairola, portfolio adviser for the Atlantis India Opportunities fund, said that much of the growth has been confined to six or seven stocks: "If you have a helicopter view, the market can look expensive, but the Indian market is not just six stocks and there is plenty of value if you look on an opportunistic basis.
"Investors need to take a five-year perspective." Mr Mehra agrees that there remains a spread of opportunities in the India market and points to the IT sector as one that has suffered in the setbacks and now looks attractive.
Pinakin Patel, client portfolio manager at JP Morgan, said: "Emerging markets have provided a safe haven, despite their 'risky' perception. The levels of risk within Asian companies are not as high as some of those in developed markets."
Source: The Telegraph
