8 reasons why Indian shares are still worth allocating
Indian shares had a very good 2017, as did most stock markets. 2018 hasn't been so rosy though, and whilst it is true global stocks have suffered too, India was hit harder than others. In February we saw an abrupt u-turn in stock market performances around the world. Most markets were down between 4-6% for the month, yet the Indian market fell by 7% in USD terms. The main reasons for the decline in Indian stock prices was due to the dampening of investor sentiment following the imposition of long term capital gains taxes on equities, the announced plans by the 3 stock exchanges to end data licensing to foreign counterparts (a ploy to gain market share from the offshore trading of Indian derivatives, notably in Singapore), and the USD 1.8 billion fraud suffered by Punjab National Bank.
A slight recovery has been seen so far in April, but whether this is the beginning of a new upward trend, I do not know yet. However, the longer term investment case for India is as strong as ever. For a while now, as many of you will know, I've been an Indian bull, thanks largely to Modi and the positive effects of his strong leadership. My views at the start of the year are largely unchanged (to read it in full, click here). The "Modi effect" has been successful and will continue to drive India forwards. In the long run GST is very positive for the Indian economy, FDI restrictions have been eased, and the massive urbanisation and changing demographics continue at an incredible pace.
Below I also highlight 8 key reasons why I believe you should consider adding India to your portfolios (or increasing allocations if you already have exposure):
Of all the G20 countries, India is the fastest growing. Since 2014, its GDP has increased around +7.50% per annum on average.
The Government is embarking on business-friendly reforms and also increased focus on infrastructure development.
India is becoming a more appealing business jurisdiction. According to the World Bank's ease of doing business index, India recently jumped 30 places to join the top 100.
The introduction of GST (Goods and Service Tax) demonstrates further forward moving reforms.
Mass urbanisation has been well publicised, but also the country is benefiting from changing demographics - it is on track to becoming the world's 'youngest country' by 2020, with an average age of just 29.
Internal, retail, demand in Indian shares is rapidly increasing with households saving more and more in domestic stocks and stock based instruments like mutual funds. This will further help to boost share prices.
The Indian stock market is still fairly undervalued. The current ratio of total market cap to GDP is currently just over 70%. This is well below the 2007 highs of 158%.
On a P/B (price to book) basis, the Indian market is only trading around its 10 year average, which I don't think accurately reflects this once in a generation structural shift the economy and country is currently witnessing.
source: World Bank, Forbes, OECD
Aside from these 8 compelling reasons to continue to invest in India over the long term, in the short term, despite the bad news in February highlighted above, there was also some good news which made less prominent headlines. Macro data, like a pick up in GDP growth (see point 1 above), and broad based growth across the agricultural, industrial and financial services sectors tell me that the economy is strengthening. Also, gross capital fixed formation grew +15%, the fastest pace for 5 years. Indian earnings announcements have so far evidenced rapid improvements too. Of particular interest to me - Vmart, Yes Bank and Heidelberg Cement saw their net profit increase +35%, 22% and nearly 300% (!) respectively. Astral Polytechnik announced a year on year increase in net profits of 43.20% and the share price subsequently shot up +11%, and that's as the markets fell! Why are these of particular interest to me (apart from the fact they are very positive reports)? Well, as many of you already know, I've been using the Alquity Indian Subcontinent fund for my own portfolio, and also for some of my clients (if they are Accredited Investors). The out performance is most impressive, as clearly illustrated in the below graph generated using Financial Express. I've included the Xtrackers ETF as this is a popular India ETF that a lot of people I know use. The common misconception is that ETFs perfectly track the index. It is a misconception due to the existence still of some charges and tracking error. A 2% drag in a year - this is yet another example of this. I agree completely that many fund managers do not justify their fees, however in this case I think it's pretty evident that Alquity have done! They continue to look at themes that will continue to benefit from the "Modi Effect" and urbanisation, so I will continue to use their fund where possible. The fund is a Luxembourg UCITS structure with daily liquidity. It is restricted to Accredited Investors only in Singapore. There are decent retail funds available too, and of course there is always the ETF. Either way, I strongly believe India should be a satellite holding in all investment portfolios, and hopefully this short article has helped demonstrate why.
For more information or questions, please do not hesitate to message me on LinkedIn or email me at ianpryor@ippfa.com
Disclaimer: I personally have holdings in the above mentioned Alquity Indian Subcontinent fund. Nothing in this article should be construed as advice. Investments can go up and down and past performance is not necessarily an indication of future performance. Seek professional advice or speak to your Financial Adviser.