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India becoming the next China

India becoming the next China

Lots of key trends are driving investment returns and one of the most important ones happening as we speak is the rise of the East. However, this trend has, in recent years, been synonymous with the rise of China, and this is unlikely to change over the next few years. While this is no bad thing because there are definitely pockets of opportunities and price dislocations in China, it has meant that Indian equities, far too often, get unnoticed. But will that change?

Whilst unrelated, let’s just take a moment for an update on Indian sovereigns. Despite Indian FAR (fully accessible route) government bonds not getting index inclusion last year, an announcement about their inclusion in the Bloomberg Global Aggregate Index and JPMorgan’s GBI-EM Index could happen at some point before the end of the year, with inclusion to follow in 2022, according to HSBC. If this does get the go ahead, it could signal the start of consistent flows into the country, which could result in widespread optimism across all Indian assets.

And from an economic perspective, India looks set to reclaim its status as the world’s fastest-growing economy. The latest IMF forecasts suggests the economy will expand at 9.5% over 2021 and 8.5% over 2022, ahead of China, for which the IMF has projected 8.0% and 5.6% growth over 2021 and 2022 respectively. Now, I know all too well that economic growth doesn’t correlate with investment returns and yes, this doesn’t provide certainty of strong returns in the short-term. However, all the things driving this economic growth, e.g. supportive policy decisions and technological leapfrogging, should act as tailwinds for Indian companies, which are likely to see an upwards trend of their fundamentals, which may lead to long-term growth for Indian assets.

The question then is…can this growth be sustained? Positive demographic trends suggest it can. India benefits from a young, highly educated population. Over 85% of the people are below the age of 55, of which just over 41% are between 25 and 54 years old. Its workforce (15-64 year olds) is growing faster than any other in the world and is even expected to exceed that of China’s workforce by 2030.

Source: United Nations, Department of Economic and Social Affairs, Population Division (2019)

Adding to this, you’ve got India’s Prime Minister, Narendra Modi, committed to his ‘Make in India’ initiative, designed to further unleash the country’s potential. We’re seeing what’s been happening with China’s “Made in China 2025” plan and with the threat of deglobalisation and supply chain disruptions, this can only be a positive for India in the long-term. And given the realisation of the overdependence on China by multinationals, they will be looking to diversify, and is there a better place than India? Cheaper labour and an English-speaking workforce. This is alongside Modi’s progression on the existing trends of better education and rising urbanisation over the coming decade.

Equity market sentiment has recently been supported by several new public listings, including digital payments specialist, Paytm, and food delivery app operator, Zomato. You also have Life Insurance Corporation, which will be India’s largest public listing. While these may not be performing as expected (on optimistic valuations rather than any fundamental issues), it is clear that India is paving the way for greater foreign investment with the regulator recently amending the rules (e.g. the introduction of controls on shareholder accountability as opposed to family controlled executives), bringing them more in line with international standards. This will result in new listings gaining more interest from foreigners, which will further support the Indian market. This is a significant positive, especially when considering what’s going on in China. Regulations over there, which have been viewed negatively, have been more of a hinderance than an additive for stock markets. Moreover, a large proportion of the new listings are technology-focused, which will bring India’s stock market into the 21st century and undoubtedly create numerous opportunities.

So, yes, the case for India is good in the long-term, but that probably won’t be surprising to those who have backed India’s recovery over the past 12-18 months, which has driven the Mumbai Stock Exchange Index to new record highs. And given the expectations of greater index inclusions, growing capital markets and a roaring economy, we could soon be having the same conversations about India that everyone seems to be having about China now, and that will obviously also affect stock prices.

However, in the middle of this long-term case is the pandemic. While China is well out of the firing line, India is still very much in it. The nation has already suffered badly, and it is not unreasonable to think they could continue to struggle as the vaccine rollout has been relatively slow. In addition to this, Indian markets are also susceptible to all the various other challenges facing global markets like global chip shortages, supply disruptions, inflation, wage growth, etc.

But, just like a number of other nations have found, low (for India) interest rates have ensured benign conditions in the stock market, and India’s central bank is in no hurry to reverse course despite rising worries about inflation. Having said that, policy normalisation will likely begin far quicker in the developing world and China before India needs to give in, which will impact the return potential there, so maybe Indian equities are also an attractive proposition in the short-term.

About the Author

Chirag joined ARP in October 2021. He previously worked at Barnett Waddingham on the manager and strategy research teams, with a focus on fixed income and private markets for over four years. Prior to this, Chirag worked at Buck Consultants for a year, focusing solely on fixed income. Chirag holds a BSc (Hons) in Economics from City University