India to get more significant for Australian investors….
Why India?
India is now the world’s 5th largest economy, at close to US$3.9 trillion, trailing only the US (29tn), China (19tn), Germany (4.6tn) and Japan (4.1tn)1. It is likely that India will surpass Germany and Japan by the end of the decade, given it will be the world’s fastest growing, major economy this decade.
However, investors globally are underrepresented when it comes to exposure to India. The MSCI ACWI has a weighting of 1.7%, with most investors underweight India, in their overall global equity exposure. This has been driven by:
- Low exposure to Emerging Markets (which have been a failed asset class over the past 15 years). Despite India’s significant outperformance of Emerging Markets, most allocators, researchers, and consultants still invest via broader buckets and hence their exposure is tainted by this thought process.
- India is seen as “expensive and volatile” in nature as a stand-alone investment.
- Western Media report only on only “events” rather than the growth and development being achieved.
However, for an AUD domiciled investor, there are several reasons why a specific allocation to Indian equities makes sense from a portfolio perspective.
1) Indian equities low correlation to Australian Equities and Global Equities, relative to Emerging Markets. India is a net-commodity importer which is uniquely different to Emerging Markets like South Africa, Brazil, Saudi Arabia as well as Australia. Hence is currency having a low correlation to commodity fuelled currencies like AUD or the EM basket. In fact, the INR/USD has about half the volatility of AUD/USD!
2) India’s Nominal GDP growth and EPS growth have correlation (unlikely many other Emerging Markets). Nominal GDP growth has average 11-12% in India over the century, which is roughly equivalent to 11% EPS growth over the period. Impressively, India’s EPS growth has much lower volatility than the US or Australia – highlighting the impact of its demographics and under-penetration opportunity.
Returns from India have surpassed most regions over the last 20 years. It is not a new story!
Apart from the reasons of low correlation, robust and low volatility earnings growth, and high returns, we also note the following reasons (if we needed anymore):
- Corporate debt-to-equity in India is at a 25-year low, due to deleveraging by corporations over the last decade. Interest rates and inflation are lower than average over the last 20 years in India – a stark contrast to the rest of the world.
- India’s banking system has good liquidity, well placed in term of capital adequacy and a significantly lower level of non-performing assets (a significant improvement compared to 2018, post-bankruptcy and insolvency reform).
- The INR is relatively stable given USD Forex Reserves are at an all time high and due to India’s inclusion in JP Morgan EM Bond Indices (June 2024).
- The IT and Pharma Industries have been significant in seeing inbound capital. • The stock market is diverse, with the largest sector 25, largest company 7%.
- India operates under a democracy, English Law and has had stable Government for 10 years now, with another 5 likely to follow.
Rising Corporate Profitability
- India’s corporate profitability has been rising since COVID. In 2008 (when CorporateProfits-to-GDP reached 7%), corporate profits were booming due to significant investment led capex in the period from 2003-2008, the ratio fell to as low as 2% by 2019 as investments ran dry and consumption / leverage drove the economy.
- However, typically India’s ROE is relatively high compared to other regions due to the significant growth from a low base in most of its addressable markets. ROE peaked during 2003-2011 when corporate debt hit a bottom and capacity utilisation was over 80% in India.
Equity Market Opportunity
Australian businesses will have opportunities to list on Indian stock exchanges. This will be a significant source of capital in the future as India’s wealth increases and equity market penetration rises. Currently India’s are investing close to US$20-25bn per annum into their own stock markets. As wealth rises this will become a source of capital for foreign businesses in a region where democracy and English rule of law prevails.
Additionally, there will be opportunity for India focused businesses to list on the ASX. For example, Findi (FND.ASX) is an ASX listed technology company which is benefitting from its ownership of TSI India, a company involved in e-transactions and payments across India.
India’s Equity Market Construct
India’s stock market is now the 4th largest in the world, with a market capitalisation of close to US$5 trillion. India also has the most listings of any stock market in the world. The Bombay Stock Exchange was established in 1875 and is the oldest in Asia. Currently there are two stock exchanges in India: BSE and NSE (National Stock Exchange).
The top 500 stocks on the BSE account for over 95% of market cap. The Top 10 stocks account for over 25% of market cap and include predominantly by Financials (privately owned banks, government owned banks and insurance firms), IT Services, Energy and Communication Services. Most of these sectors thrived in the last decade as India went through a phase of financialisation and IT outsourcing became its largest service export.
India’s largest listed firm is Reliance Industries (A$367bn) which is involved in Petroleum Refining, Communications, Financials and Retailing – a true conglomerate originating from a family who rose to prominence in the last century from textiles.
However, with an eye to the future, the sectors that are likely to emerge as winners over the current decade include Healthcare, Real Estate, Industrials (manufacturing / exports / infrastructure) and Consumer Discretionary. This will occur as India focuses on manufacturing and exporting excellence, which should lead to mass urbanisation (currently one of the least urbanised countries at 36%). Digitisation will also play a significant role in the pace of growth given 1bn people in India have a smart phone, with over 750m on the internet and almost everyone now with a bank account and a national ID card.
Why should Australian Fund Managers take note of India’s progress?
Today Australia sits as India’s 13th largest trade partner, well behind the US and China as India’s top two. In 2020, Australia was at 7th spot. In December 2022, Australia and India entered into Economic Co-operation & Trade Agreement with the focus being on tariff reduction for Australia’s export (with over 90% to become tariff free by 2026). High tariffs have on agricultural products have also been reduced. Imports from India are to become 100% tariff free from 2026.
Australia’s exports to India, ranging from avocados and salmon to electric motors and pharmaceutical goods have risen steadily. The Australian Government plans to spend $14m to further expand ties to New Delhi, including business missions for industries like agrifood, education, technology, energy, and resources such as critical minerals.
Australia has sought to ramp up its diplomatic and economic ties with India as it tries to diversify trade away from a heavy dependence on China. In July, the Australian Trade and Investment Commission will lead its first business mission to New Delhi and Mumbai, with a focus on renewable energy storage and hydrogen.
- Mineral fuels, oils, and distillation products: $10.97 billion
- Pearls, precious stones, metals, coins: $2.25 billion
- Ores, slag, and ash: $0.66 billion
- Edible vegetables and certain roots and tubers: $0.66 billion
- Inorganic chemicals, precious metal compounds, isotopes: $0.28 billion
Renewable Energy
Australia and India have joined forces to accelerate the production and deployment of renewable energy technologies that will create new economic opportunities, diversify global clean energy supply chains and help reduce global emissions.
Education
Education is Australia’s largest service export to India, valued at $4.4 billion in 2022. As of January 2024, there were 97,152 Indian student enrolments with Australian providers, which makes up approximately 17 per cent of Australia’s international student enrolments.
Defence
Australia’s defence engagement with India gathered significant momentum after we became Comprehensive Strategic Partners in 2020 and signed a Mutual Logistics Support Agreement in 2021. These arrangements have enabled Australia and India to build more complex habits of cooperation in our defence relationship.
Opportunities for Australian Businesses
The opportunities for Australian businesses to export to India are evolving beyond Coal / Iron Ore, towards food and agriculture, healthcare and hygiene, discretionary items, and education. Several businesses have already been benefitting i.e. med-tech, wine makers, education, machinery, shareholder-registry, meat, and fruit.
For example, refer to this story on India’s growing appreciation of wine as consumption patterns
change. There is substantial long-term opportunity for listed wine players in Australia.
Case Study for BHP
BHP pointed out that the rampant expansion of India’s steel industry (now the second largest steel producer in the world) will boost coal exports to India significantly, especially after the Chinese ban on Australian exports (2020). Around 40% of BHP’s metallurgical coal (coking coal) is heading to India (up from 30% in 2019). India is becoming a huge market for BHP.
India is expecting to grow its steel production to 300m tonnes a year by the end of the decade, from 125m tonnes in 2023. Steel demand is being driven by rapid urbanisation (still only 36%),which is boosting infrastructure spending and capex.
India’s Infrastructure
For example, India’s Road Network is now the second largest in the world, spanning 6.7m kilometres and includes national and state highways, district, and rural roads. Roads are being built at a pace of 27km per day! Since Narendra Modi took office in 2014, 90,000 kilometres of National Highways have been built, which is almost double that of previous decade. This is set to grow by a further 8-10% in FY25 according to ICRA, India’s ratings arm of Fitch.
Companies like Macquarie Bank already have a strong presence in India through Infrastructure and Financial Services.
Government Spending likely to lead to Private Capex (as Capacity Utilisation rises)
India is shifting to an Investment Economy, after spending most of the 2010-2020 as a Consumption Economy (post GFC and clogged up capital / low private sector investment). This will create a multiplier effect for growth. There will be significant opportunities for businesses in Energy Transition, EV component manufacturing, Lithium producers, Real Estate, from both Foreign Direct Investment, Public-Private Partnerships and Joint Ventures.
The likes of Apple, Samsung, Amazon, Walmart, Tesla are all making forays into the region due to its demographics (labour cost advantage, scale economics) and its increasing allure as a place to do business, particularly as Logistics costs reduce.
How to Invest Successfully in India’s Growth Story
- Find listed Australian businesses which can increasingly participate and/or benefit from India’s growth industries, which are diverse and not just focused on raw material export of commodities.
- Invest in Indian equities to gain direct exposure to growth industries which are benefitting, particularly with an emphasis of government spending/focus.
- Partner with local stock pickers who understand the local corporate ecosystem for regulation, politics, business ethics and understand founder behaviour and mindset. Over 40% of India’s stock market is owned by local founders / promoters and hence deep insights are required from local practitioners. Investing passively via ETF’s will not provide “true” exposure to the evolving growth story.
- Benefit from long-term compounding from under-penetration, rather than seek to play the valuation game in favour of other Emerging Markets. India’s earnings growth has very low volatility relative to other regions due to its demographics and growing addressable markets from a low base.
Outlook
- To become the 3rd largest economy in the world behind USA and China
- A manufacturing option for the world and an alternative to China. India is 3% of global manufacturing, compared to China’s 30%. Manufacturing to rise from 15% to 25% GDP.
- By 2030, India’s population will have one of the lowest dependency ratios in the world.
- Reforms will improve livelihoods and will lead to efficiency via productivity gains, with GDP per capita set to rise.
- Massive financialisaton of savings will occur leading to gains for the equity markets (US$10bn a year). India’s financial savings is only 5% of Household Wealth (US 40%).
- Entrepreneurial and tech capabilities allow for unicorns to emerge with tailwinds of scale and cost (Internet penetration now 50% and Smart Phone enetration 5%).
- Corporate profitability-to-GDP to rise from a low point + GDP rise over next 7 years to US$7tn = significant equity market gains.
- ndustries like Pharma, Data/Knowledge Storage, Auto/Ancillaries, Electronics, Chemicals to emerge as global leaders.
- India’s market cap to hit US$5-10trillion and be the 3rd largest in the world by country (after US and China).
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