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There is one aspect of investment that all practitioners of this noble art share, which is an immediate attraction to markets that have performed well historically, over those that have done poorly. And since India has been one of the best performing major stock markets globally in the last 30 years, compounding returns at 9.9% in US dollars since 1987 (better that the US and only fractionally worse than Hong Kong), taking a close look at the future outlook for India’s investment opportunities is a wise strategy. Investors take great heart that stock market returns in the country have been top of the class globally, not because of the government, but inspite of it.
Simply put, India has performed well because it has benefitted from, and continues to enjoy, strong investment fundamentals, setting it apart from most developed and developing economies. This has led to consistent and above average GDP growth, and robust corporate profitability.
Foremost of these fundamentals is young population, 50% of which is under 25, producing a falling dependency ratio and thereby creating a hearty appetite for consumption. This is supported by low levels of debt, particularly amongst consumers. It’s a potent investment cocktail when combined with low penetration of basic goods, a vast and expanding population and a technological revolution that is bringing communities closer together all over the world. This is not the UK or Europe, or worse still Japan, all of which struggle with ageing populations, low productivity and mountains of debt, spread liberally across governments, the consumer and the corporate.
Walmart’s sale of UK supermarket chain Asda, to part fund its purchase of Flipkart in India, is all one needs to know as to where the world’s pre-eminent retailer believes future opportunities lie. And India is not China either, which also has an ageing population, slowing growth and a political framework that is far from “investor friendly”. By contrast, India is an English-speaking democracy, with an abundance of low-cost labour, an arcane but functioning independent judiciary, and highly respected central bank which ably regulates a sophisticated financial sector. Politics in India is also becoming more transparent and hence more competitive which is driving more pro-growth policies, as politicians become more accountable to their electorate.
It is not Brazil or Russia either, two other emerging market economies to which it is often compared. Both put forward limited opportunities outside of the commodity sector, which dominate the respective listed indices. India contrarily offers a wide range of investible opportunities across a diverse range of stocks and sectors, many of which compete on the global stage. This ability to compete is a consequence of a deep pool of managerial and entrepreneurial talent that exists both inside and outside the country, which will continue to promote India’s compelling fundamentals to a wide range of foreign investors.
Equally important to the long-term investment story is the potential growth in productivity that India commands. Since the United States has set global standards in this aspect of investment returns in the last hundred years or so, perhaps India can pick up the baton? It has been suggested that as much as one-quarter of the incremental gains in productivity that have arisen in the USA in the latter half of the last century arose as a consequence of the construction of the inter state highway system, championed by President Eisenhower. This brought huge efficiency gains in transportation costs, greater opportunities to sell more goods to more markets, increasing consumer choice, and keeping prices low. Connecting the country through physical, financial and technological highways as is currently underway in India will provide similar productivity benefits, fast-tracked by a lower cost of capital and a more educated, healthier workforce.
None of this is to say that there are not enormous challenges fulfillment of these opportunities, not only from a top down and bottom up approach, but in the short and long term also. In addition, equity market valuations often reflect this positive bias, so stock pickers need to be acutely focused on acquisition cost. The market is hostage to weak, albeit improving, corporate governance which also places high emphasis on capable stock picking. Already elevated levels of foreign ownership at a stock level, increases the risk of sustained outflows should investors repatriate cash in times of stress. Politics can override sensible policy-making at times as politicians woo voters at the expense of fiscal credibility and market valuations. Investment in primary education and healthcare is falling short of minimum levels, which is deeply worrisome whilst employment growth is not keeping pace with the numbers of young people entering the working population.
As investment managers focused on delivering consistent alpha to our offshore clients, Ocean Dial’s investment approach is deliberately long-term in nature, helping to iron out the inevitable bumps that occur along the way. The strategy is to run concentrated portfolios of high quality stocks whose management teams have demonstrated a historic track record of delivering credible returns to their shareholders over time. We look to use the volatility of the market to enter positions at attractive prices, with the intention of holding positions for three to five years at a minimum, enabling the portfolio to maximize its potentials to compound returns over time. Compounding returns, as Einstein was reputed to have stated, are the “most powerful force in the universe”. Given the opportunities that exist in India, foreign investor interest is only expected to increase. Even if only a fraction of the country’s potential is fulfilled in the years ahead, India is more than likely to remain at the top of the class.