Archive for 2025

Australian investors are increasingly becoming aware of India’s growth potential due to its demographics. The next question is usually how? The Cost of Convenience.. Global investors are increasingly gravitating towards country-specific investments, with India drawing significant attention due to its economic momentum and favourable structural-demographic trends. Australian investors can access the India growth story directly by investing in India specific unit trusts or via ASX/NYSE listed ETF’s. Those looking for a tactical trade or a “bet” on India based on an asset allocation view usually choose the most convenient path to access India’s “beta” rather than looking for “alpha” given its a niche investment in a portfolio. ETF’s are a convenient way to access India’s growth story. However, it is important to understand the “cost” of convenience….. Across almost all time periods, India focused ETFs have significantly underperformed their own benchmarks/indices. Across longer-term periods (3-5 years), India ETFs produce a slippage of roughly 3% p.a. outside of fees. This is a hefty differential in return to be giving up each year, underscoring the price tag that comes with convenience. The global AI market is projected to grow at an impressive annual rate of 37% from 2024 to 2030, signalling a major transformation across economies worldwide. India’s rapid AI adoption positions it uniquely within this trend, making it a country to watch closely for investors seeking exposure to AI-driven growth. India’s swift deployment of AI is driven by several distinct factors, including AI optimism in the workforce, strategic government initiatives and private sector investments. These elements create a high-growth AI environment that would be difficult to replicate elsewhere, suggesting India may capture substantial economic and corporate gains from the AI boom Source: ETFs are both domestic and international domiciled in AUD. Performance is calculated on a post-fee return basis. Returns as at 30/04/2024. This compares with 0.1% slippage for both Australian and US stock ETFs relative to their indices/benchmark (e.g. ASX 200 or S&P500), which highlights the difficulty of capturing index returns in the Indian market and the need to maintain active positioning, especially in a more inefficient market like India.  There are several factors for this slippage in India, which we outline below: 1. Impact of taxation on both India-focused Fund’s/ETFs on performance In India, the capital gains tax of 10% is charged for investments held longer than one year (15% for those held less than a year). This impacts the investment returns of India Fund’s/ETFs that pay those taxes. NAVs/unit prices are calculated after taxes are paid in India. However, due to a bilateral tax agreement between Australia and India, investors receive a partial to full refund of capital gains taxes paid in India by the Fund’s/ETFs they invest in at the point when they lodge their tax refund. This however has an impact on the returns of investment vehicles relative to their indices/benchmarks when it comes to investing in India (for India-focused vehicles as well as EM/Asia/Global funds investing in Indian stocks). This can lead to a slippage of approximately 50bps per annum (assuming yearly returns of 15% and 30% turnover). This cost is inevitable for a foreign investor in India. It highlights the slippage against a benchmark like the MSCI India (which does not have any inherent CGT embedded in its calculation). This can be much higher than 50bps in a higher returning year. Sizeable implementation cost India is a relatively costly market for transacting in financial securities. The implementation costs of trading Indian securities encompass both transaction costs and global custody expenses. For foreign investors, such as Australian/Global ETF providers, utilising a global custodian for transactions in Indian securities can incur costs of up to $50-70 per trade, in contrast to using a local custodian, based in India. Management costs India ETFs are not cheap and low cost to implement, with the largest India ETF in the world at US$ 10bn AUM charging approximately 60bps per annum. India-focused ETFs have a Management Expense Ratio (MER) of 60-80bps in general. It is not the same cost as implementing an ASX 200 or S&P 500 view with ETFs. High turnover As previously noted, India is a relatively expensive market for security transactions. This expense is further magnified when implementation is via a model and rebalancing structure (as practised by most passive/ETF structures). To replicate the index, these ETFs undergo quarterly rebalancing, resulting in frequent transactions of the underlying securities. On average, India ETFs experience an annual turnover of 25-30% whilst generating a substantial number of transactions due to this rebalancing mechanism. This can lead to significant slippage in implementation. Other factors Several other factors contribute to the significant tracking differences between India ETFs and their benchmarks: 1) Disparity in trading time zones (basis risk of using Nifty 50 futures for exposure). 2) Currency conversion impact cost (global custody rates in regions where AUD-INR is not heavily traded. Timing differences can also result in slippages in the currency conversion process. 3) Given ETF valuations are determined on a mark-to-market basis, traders are required to execute transactions on the same day. With only a 1.5-2.5 hour overlap between Australia and India’s trading house, the buy-sell spread can widen considerably, leading to slippage. What is the alternative? To gain exposure to India’s growth story without incurring substantial slippage/costs, active management utilising local infrastructure and cost frameworks is likely to provide a more effective approach. When we aggregate the performance of active managers to compare with India ETFs, we find that on average the active managers perform significantly better than ETFs. *Source: Morningstar (Figures are in AUD after-fees, active managers taken from India only active funds based in Australia) While some of the aforementioned factors are also relevant to actively managed funds, active managers can operate more efficiently, enhancing long-term success prospects. Employing active managers with a long-term horizon using actively managed allocations results in lower transaction costs and more effective tax management. A strategy that leverages localised knowledge for stock picking and portfolio construction, as well as local custodians via a unit trust structure, can

E=MC Emerging markets = Muted growth x Concentration risk When investing in Emerging Markets (EM), expectations typically revolve around two key objectives: High GDP growth, which is expected to translate into high returns Portfolio diversification benefits However, upon closer examination, both of these expectations have fallen short. Muted growth Following a period of explosive growth from 2002 to 2007, EM performance has largely stagnated. Over the past five and ten years, EM funds have delivered annualised returns of less than 2%. Source: MSCI, performance in USD, as of 30/09/2024 The basket of economies classified as “Emerging” have lead to a poor translation of GDP growth to equity returns. Stock picking in this area hasn’t been great either, with alpha achievements (as an average) being relatively mild. Source: Refinitiv – 13 large EM Funds Correlation of GDP, earnings and returns The expectation that high GDP growth would lead to high returns has not materialised. This is not because EM economies have failed to grow, but rather because this growth has not translated into higher corporate earnings or equity returns. Source: MSCI, Refinitiv, IMF Historical data reveals a negative correlation (-0.29) between EM GDP growth and corporate earnings over the past 114 years. This means economic growth in EM countries has not reliably driven corporate earnings or equity returns. On average, EM returns have been less than half of their GDP growth, with countries like Turkey, China, Brazil, and South Africa dragging down overall performance. Cyclicality of returns With the exception of a few structural growth stories like India and Taiwan, most EM countries experience isolated booms and busts, displaying cyclical growth that cancels each other out at an aggregate level. The result is volatile underlying country weightings and survivorship issues, as countries like Russia and Portugal have come and gone from the EM index over time. Source: Refinitiv, performance in USD Concentration risk Since the birth of the EM index, there has been a rising correlation between EM and Developed Markets (DM). diminishing the diversification benefits that investors seek in EM. This means investors are increasing the concentration risk for their equity portfolio. Source: MSCI, 30-year data as of 31/12/2023 This has been driven by several factors: Globalisation of resource pools and the broader economy since the 1990s Increasingly global revenue streams for multinational firms, with over 30% of S&P 500 revenues coming from emerging economies ACWI mandates are common, with benchmarked passive and active allocations therefore providing liquidity to both segments Many EM mega-cap companies, such as Taiwan Semiconductors, Samsung, and Infosys, operate as global businesses. What should we do? Despite the challenges with EM as a broad investment class, we shouldn’t throw the baby out with the bathwater and disregard the market entirely. The problem lies with the structure of EM and how all of these countries are meshed together to create a single incoherent product. Investors can still look for structural stories by following a new equation: S = HD Single country = High structural growth x Diversification (low correlation) High structural growth By dissecting EM at the country level, the contrast between high and low-performing countries becomes clear. Selecting the right countries can lead to superior long-term returns. Source: MSCI, performance data in AUD, as of 30/09/2024 The key to robust performance is identifying countries with secular growth stories, supported by long-term fundamental drivers. To differentiate structural growth from cyclical or one-off booms, investors should assess not only historical and forecasted growth but also the volatility of growth over time. Countries with consistent and stable growth are more likely to deliver sustained returns. Source: IMF Based on the results, we can observe that although at an aggregate level, EM has a high growth, high volatility profile, the underlying countries vary vastly. We can pick out the countries with a profile of high GDP growth and low GDP volatility as they are likely part of the structural narrative that will persist over the long term. Diversification benefits In addition to offering stronger growth potential, selecting individual EM countries provides investors with enhanced diversification within their equity portfolios. A large portion of individual EM countries have a lower correlation to the global equities (MSCI World) as compared to the EM index. Source: MSCI, 30-year data as of 31/12/2023 By shifting focus from the EM index—a “basket of misfits”—to specific EM countries with strong growth fundamentals, investors can finally achieve the returns and diversification benefits they initially sought. The traditional EM equation (E=MC) can be replaced with a more focused approach: S=HD, where structural growth and high diversification unlock the true potential of emerging markets. The next phase of markets is going to require a deeper dive into EM for better results!

Why This Country Stands to Gain the Most from the AI Revolution According to an IBM report, India has the highest AI adoption rate, 59%, in terms of AI deployment. Source: IBM, Statista The global AI market is projected to grow at an impressive annual rate of 37% from 2024 to 2030, signalling a major transformation across economies worldwide. India’s rapid AI adoption positions it uniquely within this trend, making it a country to watch closely for investors seeking exposure to AI-driven growth. India’s swift deployment of AI is driven by several distinct factors, including AI optimism in the workforce, strategic government initiatives and private sector investments. These elements create a high-growth AI environment that would be difficult to replicate elsewhere, suggesting India may capture substantial economic and corporate gains from the AI boom AI in the workforce India’s rapid AI adoption is notable, with 92% of Indian knowledge workers already using generative AI—significantly higher than the global average of 75 ndia’s workforce is very optimistic about AI. According to Puneet Chandok, President of Microsoft India, this high adoption rate reflects India’s readiness to integrate AI at scale. Microsoft and other tech leaders are supporting training initiatives to prepare 2 million people with AI skills by 2025, further strengthening India’s AI capabilities. This proactive approach highlights India’s unique advantage in a world increasingly reliant on AI talent and technology integration. Government-Led “Bottom-Up” Approach India’s government has been instrumental in fostering AI, deploying a “bottom-up” approach by building digital public infrastructure (DPI). Combining technology with public services, DPI has created broad access for over 900 million internet users, improving governance and payment systems, and providing a robust foundation for AI development. India’s AI strategy is ambitious; in March 2024, it allocated $1.25 billion toward the IndiaAI Mission to support startups and computing infrastructure, further boosting its competitive edge in the global AI race. Additionally, the government is developing targeted language models for public services, demonstrating India’s commitment to creating AI solutions that cater to its diverse population and that could serve as blueprints for similar challenges globally. India’s Growing AI Infrastructure and Private Sector Investments The spotlight on India comes at a time when many countries around the globe are keen to foster their own competing AI systems rather than turning to the U.S. or China. In the last few years, the Indian government has nurtured an ecosystem where global players like Google and Meta, Indian businesses like Reliance Jio and Tata Consulting Services, and homegrown startups can take advantage of its cost-efficient technological landscape. The demand for computing infrastructure has also led the Indian government to procure 1,000 GPUs to power AI innovations. With support from global chipmakers like Nvidia, which recently partnered with Indian cloud services company Yotta, India is rapidly expanding its AI infrastructure. Private sector giants are also racing to develop AI projects. Tata Consultancy Services (TCS) and Adani Group have announced major investments in generative AI, further cementing India’s AI ambitions. Reliance’s collaboration with Indian academia to launch “Bharat GPT,” a ChatGPT-style service tailored for India’s linguistic diversity, shows how Indian companies are embracing AI to drive productivity and innovation across sectors. What Does this Mean for Investors? As mentioned earlier, these unique factors place India in a strong position to benefit from the AI boom. The adoption of AI in India is being used in almost every industry in the country, potentially contributing to a massive economic boost. According to EY, Gen AI’s contribution would translate to US$1.2 trillion to US$1.5 trillion cumulated GDP by 2030, representing an additional CAGR of 0.9% to 1.1% to its GDP growth. This is on top of an already impressive growth trend for the Indian economy, potentially accelerating its dominance as not only an important investment region for investors, but as a unique asset class that deserves a place in every portfolio.

India’s economic growth is likely to be superior, relative to most major economies over the next 20 years. This transformative growth trajectory is expected to unfold throughout this decade and likely extend well into the next, solidifying India’s position as a key player in global markets. India’s GDP Projection Source: IMF WEO Database, data as of 31/10/2024. *Growth based on IMF       Forecasts for India’s real GDP Growth plus the addition of RBI target inflation rate of 4% Since 1991, India’s economic reforms have significantly liberalised its economy, paving the way for modernisation and transforming the nation into a global leader in industries such as technology, pharmaceuticals, and services. With a large, youthful, and ambitious population, coupled with progressive reforms introduced by the Narendra Modi-led BJP government since 2014, the pace of GDP growth has accelerated, particularly following the recovery from the pandemic. India’s economic resilience is evident in its 6.4% average real GDP growth over the past 25 years. Looking ahead, the IMF projects this robust growth to continue throughout the decade, positioning India as a standout performer within the G20 economies. This optimistic outlook is underpinned by ongoing reforms and incentives, the country’s expanding role in the global workforce, and the steady rise of urbanisation. India’s GDP growth superiority over China, EM and DM Source: IMF WEO, data as of 31/08/2024 The political landscape of India is conducive to growth and wealth creation India’s economic growth has been driven by both the public and private sectors, which is made possible by a political backdrop that promotes sustainable development. The political regime is democratic, which has legal protections, transparency, economic stability, and social investments making it more conducive to higher equity returns. The Government of India has undertaken significant economic, regulatory and market reforms since 2014 such as Demonetisation, the implementation of the GST, the application of the Insolvency and Bankruptcy Act, the Real Estate Act, Production-Linked Incentive scheme which has streamlined processes, improved the business environment and provided greater protection for asset owners and as a result, attracted foreign investment (by the likes of Walmart, Google, Facebook, Amazon, Suzuki, Ford, Hyundai, Pfizer etc.). Foreign Direct Investment into India has risen from US$36bn in FY2014 to US$71bn in FY2024, with rising foreign ownership permitted. India’s growth is structural India’s GDP growth stands out not only for its rapid pace but also for its lower variability, underscoring its status as a structural, long-term growth story. This stability is driven by the region’s favourable demographics, which fuel rising demand for goods and services, along with India’s growing integration into global supply chains. Additionally, India has emerged as the highest-growth region globally, reinforcing its secular growth narrative. The combination of high GDP growth and low volatility is further illustrated below. Full article can be found at https://www.livewiremarkets.com/wires/harnessing-india-s-growth