India Time Now

Financial planners can be forgiven for lumping India among global or emerging markets portfolio investments, rather than taking a view on a country basis. Yet India and its investment environment and markets warrant serious consideration for their own investment allocation.

Exposure to India via a global investment fund is no longer enough. India has something that other countries do not: a unique combination of demographics, politics and economics within a diversified investment market, allowing planners and investors to consider a specific country allocation.

The issue for Australians investing into India is accessing funds that have the right licensing and compliance structures for this market.

Global and emerging market funds are often slower to move on specific opportunities, are often constrained by their asset allocation and benchmarked to the larger stock markets.

Why is now the right time for India ?

Widespread market deregulation within India has fostered a dynamic market culture that has driven growth through increased consumer demand.

A continuing policy of market deregulation and liberalisation of India’s foreign direct investment guidelines, which commenced in 1991, has boosted gross domestic product (GDP) performance. Foreign investment has steadily increased, with approximately 25 per cent of Indian companies owned by foreign investors, which is always a good indicator that investments are secure.

Since 2001, the Indian stock market has outperformed the Chinese and Australian stock markets.

Growing affluence within a large sector of the population and rising incomes will fuel demand for goods and services in the future, with private consumption forecast to increase by an average of 6.8 per cent in 2007 and 2008.

Twenty-six years of positive GDP growth is revolutionising the Indian economy. Growth has roughly doubled that of Australia and the US, and is likely to reach the Indian Government’s target of 10 per cent growth per annum by 2010.

India is now a favoured private equity destination, surpassing China and Japan, and is set to become one of the biggest merger and acquisitions markets during 2007, according to the Asian Venture Capital Journal.

Continuing deregulation has fostered the development of globally significant Indian companies in sectors including pharmaceuticals, auto components, information technology and business process outsourcing.

As a result, the Indian economy has steadily diversified, with no one industry sector dominating the BSE 200 Index.

This market diversity is a crucial difference between India and other members of the BRIC (Brazil, Russia, India and China) countries.

Brazil and Russia by comparison are commodity-driven economies, which makes growth more volatile.

In Russia, more than 70 per cent of market capitalisation is oil-related businesses, whereas in India’s diversified market no individual sector accounts for more than 20 per cent of index composition.

From an Australian investor’s perspective, the important point is exposure to India will not generally affect the position (weighting) to resources and this particular sector’s risks.

Sector opportunities

So which sectors have the potential to grow faster than the Indian economy over the next few years? Any sector hinged to the three big drivers of India (demographics, outsourcing and infrastructure) provides the biggest opportunities.

Demographics are behind an internal consumption boom, which is forcing further change. While almost every other major economy faces an ageing population, India is set to be one of the youngest nations for the next 50 years, driving internal demand and capacity.

Currently, over 45 per cent of the Indian population is under 20 years of age, with two million graduates every year from its universities and colleges.

The cumulative wealth of India’s affluent sector was US$203 billion in 2005, but it will be US$322 billion in two years. A whopping 1.1 million individuals will have liquid wealth of US$100,000, not to mention the 83,000 Indian millionaires.

This has led a growing number of India’s 1.1 billion people to demand better quality services in banking and finance, insurance, organised retailing and mobile telecommunications.

These sectors currently have very low penetration levels: less than one in 30 Indians now have access to credit cards, mortgages and consumer loans; organised retail has a penetration of less than 3 per cent, compared to 20 to 30 per cent in other emerging countries and 70 to 80 per cent in the US and Europe. This represents a huge opportunity for high sustained growth rates in these sectors.

Infrastructure is another long-term opportunity. Its rate of implementation is important for the Indian economy to maintain its growth rate, and it is therefore also a key risk. Infrastructure development has been slow and is currently poor compared to China, but change is underway and India will use public private partnerships for the next phase. More than $300 billion is forecast to be invested in infrastructure over the next five to seven years.

No other country in the world has India’s combination of demographics, population size, financial liberation and growth.

Planners and investors have much to gain when considering India as a specific country allocation as part of their long-term investment plans, because the time for ‘incredible India’ is right now.

John Pereira is the chief executive of India Equities Fund.