Demographics favour Indian investments

Consistent double digit returns on investment, a GDP growth that is double that of the world average and swelling domestic consumption fuelled by a burgeoning middle class are but a few of the ingredients that have been spicing up the Indian market during a bland global economy. Just how does India do it?

Welcome to the fastest growing economies in the world, says Marc Cevey, CEO of HSBC Global Asset Management (Canada) Ltd. “India is not quite as dependent on foreign credit markets and capital to the extent of some other economies, so for all intents and purposes, (global events like Greece crisis) had a very limited impact on India.”

India’s largely insular economy is the result of a robust domestic market. “Unlike most other developing economies, (India) is not very dependent on the global economy,” says Cevey.

Inherently a very inwardly focused economy, only 15% of India’s GDP is export oriented, “which means that it is going to be sheltered by that continued growth in consumption internally, notwithstanding the weakness around the world,” says Cevey

Although economic development still lags in China — its toughest competitor — by an estimated 15 years, India is still quite a compelling story. Mark Mobius, executive chair of Templeton Emerging Markets Group is watching India closely.

“We believe that in the long term India will grow at a fast pace and become one of the world’s leading consumer markets,” says Mobius. “India has over one billion people with a free market economy so that the growth in private sector opportunities is expanding at a fast rate.”

Being home to the world’s second largest population has its advantages. It’s called the middle class, and with that come middle class aspirations — the engine and the fuel of India’s economy.

“The most compelling story of India is its demographics; about 25% of the world’s population under the age [of] 25 resides in India,” says Cevey, pointing out that India’s current middle class population of 330 million is expected to double over the next 10 years. “This should provide quite a substantial boost to consumer demand in a pretty sustained fashion, which we view as the main contributor to growth over the next five to 10 years.”

Cevey views India as China 15 years ago, and feels India needs to make significant investment in infrastructure to operate at its full potential and become a bigger contender.

“The bulk of the more sustained growth that happened in China was over the recent years,” he says. “India is definitely embarking on a similar journey.”

Bad infrastructure is a good opportunity. While it limits the potential of India, it also has the potential to become a growth industry. Power shortages also present a challenge, but one that is also quite an opportunity.

“Currently the biggest issue for India is that it experiences significant power shortages,” says Cevey. “It produces about one sixth of the electric power that China produces for a population that is fairly comparable.”

Government bureaucracy and poverty remain serious drags on the economy, however, and Mobius says corruption is a growing impediment.

Sectors that offer the best investment opportunities in India are invariably linked with growing consumerism propelled by per capita income and its disposable component.

“The sectors that we favour today are very consistent with our view of that economy, such as consumer discretionary stocks,” says Cevey. “Auto is certainly a sector that we favour. We think that car sales will continue to grow at double digit [rates] for many years to come. Infrastructure plays a very important role and is overweighted in our portfolio as well.

“To a lesser extent financials, although they are no longer quite as cheap as they used to be, but they still provide balance in this environment.”

India should be able to sustain strong GDP growth of between 7% and 8% over the next few years, which means Indian stock markets should do well, says Savjiv Duggal, the world’s leading Indian equity fund manager.

“India should deliver a return of about 15% on average over the next five to 10 years from the stock market,” he says. “India is one of the largest stock markets in the world. It’s the forth largest country in terms of GDP and purchasing power parity. It should become a core holding in people’s portfolios.”

Like other markets, however, the fact sheet on India doesn’t come without the fine print at the bottom. Despite its get-rich-quick appeal, experts say investors should enter the Indian market with caution.

“Canadian investors should be aware that like all emerging market, they are contending with more volatility than in our markets,” warns Cevey. “It is more than double that of developed market. Clearly it’s not for the faint of heart.”

He urges investors to look at the emerging markets as an integral part of global diversification in their portfolio, and India within those markets being one of the most compelling stories.

The market, he says, will continue to offer double digit returns over the next several years, outperforming most other indexes.

That threat of volatility means investors should avoid trying to time the market, he says, and use a dollar-cost averaging strategy to build exposure.

(08/26/10)