Photo: Bahnfrend Creative Commons Licence
India’s growing population and rocketing spending power are the main magnets
AS THE world economy rushes headlong into a period of credit crunch-inspired turbulence, India is emerging as a safe haven for equity investors’ cash.
With a huge and growing domestic market, India offers secure growth prospects for domestic industrial and services companies. As a result, its economy is widely described as being “insulated” from the crunch that is causing so much pain elsewhere, although the extent to which that is true is the subject of much debate.
In today’s uncertain economic climate, such insulation is seen as a strong positive by investors. “India is a largely a domestically-orientated economy that is relatively well-insulated in the event of a global slowdown,” said Vijay Tohani, manager of the First State Indian Subcontinent fund. “For longer-term investors, India remains a potentially ‘high alpha’ market, offering many well-managed companies in the strong domestic growth environment.”
The expectation is that the subcontinent’s one billion plus inhabitants will continue to strive to attain higher living standards and access to better-quality products, irrespective of the economic turmoil being felt elsewhere in the world. As local players gear up to meet burgeoning local demand, India’s GDP is expected to increase by 7.9 per cent in 2008 and by 8 per cent in 2009, according to recent figures from the International Monetary Fund.
Like markets worldwide, India’s has experienced it’s fair share of volatility in recent months, but investors should not be deterred by the 30 per cent plunge the India’s main stock market took in the first quarter. The Bombay Stock Exchange Sensex index surged by 499 per cent between November 2001 and 2007, peaking at 21,207 on 8 January. However, by 17 March it had fallen back to 14,809, before a recovery helped it back to 17,287 by the end of April.
Craig Farley, an India specialist at Jersey-based asset managers Ashburton, believes this correction has given investors “a very attractive entry point to the world’s most exciting investment story. India now offers a perfect environment for equities”.
The best prospects for investors are likely to come from companies and sectors that derive their growth prospects from domestic consumption rather than those that are dependent on exports, with the most promising including fast-moving consumer goods, consumer durables, housing and pharmaceuticals.
Michael Dow, investment director at Standard Life Investments, believes that shifting demographics – with growing numbers of young people poised to enter the work force – adds to the country’s attractions.
“As more young people enter the workforce, there is also widening scope for banks and financial services firms to capitalise on an increased appetite for saving,” said Dow. “Within the sector, we like State Bank of India and Axis Bank. The latter is differentiating itself from its competitors by growing its financial services proposition alongside moves to develop more sophisticated investment products for corporate clients. This should stand it in good stead as India’s savings ratio goes ever higher.”
Dow also believes that Dishman Pharmaceuticals & Chemicals should benefit from growing demand among western pharmaceutical companies for outsourced production.
The Gujarat-based company recently signed third-party manufacturing contracts with Johnson & Johnson and GlaxoSmithKline. Dow, who said that until recently it would have been “inconceivable” for an India-based pharmaceuticals company to be trusted with such sensitive work, also likes the look of Syntex Industries, which makes prefabricated buildings, seeing it as poised to benefit from surging demand for affordable housing.
Christopher Wood, chief strategist at Hong Kong-based brokers CLSA, is so positive about India’s economic prospects that he invested 35 per cent of his total Asian investment portfolio in the subcontinent. “One of our favourite long-term themes in Asia remains the Indian infrastructure story,” Wood explained. “India’s infrastructure development is set to accelerate, backed by greater private-sector participation and improved finances of government and public-sector enterprises.”
He has invested in the engineering conglomerate Bharat Heavy Electricals, which he believes will benefit from a “multi-year boom” in demand for its products and services on the back of a predicted $1 trillion infrastructure construction surge.
The economic slowdown in the United States of America and Europe could also, paradoxically, help the Asian economy and some of its companies. Both outsourcing and offshoring, which last became a political hot potato in the economic slowdown of 2001-3, are once again expected to climb the agenda again as firms in developed nations seek to cut costs.
Indian companies expected to benefit from this second wave of outsourcing include Infosys and Tata Consulting Services (TCS). The latter recently signed a major contract with Chrysler to develop and handle IT for the Detroit-based car giant.
And in one of the most pertinent signs of the tectonic shifts in the balance of economic power, underlining that India is now playing with the big boys, TCS’s parent group Tata Group recently acquired the Anglo-Dutch steelmaker Corus as well as the iconic British car brands Jaguar and Land-Rover from Ford.
INDIA – FACTS AND FIGURES
Covering more than 1.2 million square miles, India is among the world’s biggest countries.
• India is expected to overtake China as the world’s most populous country within the next 25 years. Its population has grown from 357 million in 1950 to more than one billion today. By 2030 it is expected to be home to 1.6 billion people, compared with China’s 1.4bn.
• It is a nation of prolific film watchers and makers. About four billion trips are made to the cinema each year – many more than in any other country.
This article was published in The Scotsman on 3 May 2008