The case for stand-alone investment in Indian equities
We believe investors should increasingly consider India as a separate equity allocation, rather than being part of a broader regional or emerging market allocation.
We believe investors should increasingly consider India as a separate equity allocation in the way many now view China. The Indian equity investment opportunity is backed by the size and growth potential of a substantial domestic economy and by recent changes which will remove many of its historic inefficiencies. Its stockmarket offers a wide range of attractive companies.
India is the seventh-largest economy in the world and the fastest growing amongst major economies. This growth should enable it to become the fifth largest within five years. It is supported by its leadership position amongst emerging countries in using technology to transform its financial system, including e-authentication, financial inclusion and payments infrastructure, giving its entire population the opportunity to participate in the formal economy. This is reflected in record numbers of bank accounts being opened (Figure 1). It is estimated that digitisation could add 50-75 basis points to India’s GDP growth rate.
Source: Schroders and Thomson Reuters Datastream.
India benefits from large and relatively open capital markets, allowing foreign investors to participate in a large number of local growth opportunities. The local stockmarket is vibrant, with a large set of listed companies across the capitalisation range that have a track record of delivering profitable growth and, potentially, diversification benefits to a global portfolio. This has encouraged global portfolio investors (both multi-country and single-country) to invest sizable amounts in India. It is notable that out of the last 20 years, foreign portfolio investors have been net sellers of India in only two calendar years – one of which was the year of the global financial crisis.
It is true that the equity market is relatively richly valued, but in our view deservedly so, and we anticipate significant future earnings growth. The depth and breadth of the Indian equity market, and therefore potential upside, is unlikely to be fully captured by a limited weighting within a global or regional mandate or through an index exposure.
The distinctive feature of Indian equities (which also makes this market fertile territory for active management) is the scale and dynamism of the small and mid cap sectors, which are not fully represented in global benchmarks. To address this imbalance in global portfolios, we recommend that existing large cap exposures to India should be complemented by a stand-alone investment that can exploit the full spectrum of opportunities in the equity market. Although volatility is high, the diversification benefits of adding a substantial allocation to Indian equities improves the efficiency of portfolios, as expressed by the Sharpe ratio, shown below.
Data from 2003-2017. Source: Schroders and Thomson Reuters Datastream.
As ever, with single country emerging markets, the investment risks are higher than in developed markets. They include foreign exchange risk, political, legal, counterparty and operational. All these factors mean that investors may not get back what they originally invested.
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