When a country is experiencing sustained economic growth, there are usually some significant structural tailwinds. Typically, favourable demographics can provide a sustained phase of economic growth.
India is currently experiencing the benefits of its underlying demographics. The key aspects to its demographics are the size of its population (above 1.4 billion people) and the average age of this population (29 years of age). This is leading to a lower dependency ratio i.e. lesser proportion of non-working age (dependents) to working age (15-65).
Dependency ratio: India vs China
Source: World Bank
It is likely that the lines will cross around 2030. China’s growth can be linked to its dependency ratio, with a peak in achieved in 2010 when the ratio reached its lower point. At this point 2/3 of the population was working age. As China’s population ages and dependency rises, its growth will inevitably slow and less of the population becomes productive.
India’s economic growth is now sustainably higher than China’s. This has happened as India’s dependency ratio continue to fall, leading to the world’s largest working age population.
Source: IMF
The IMF now forecasts India to take leadership over the rest of the decade in comparison to China and other Emerging Markets as well as compared to developing countries. Typically, a country experiencing strong economic growth is also likely to have several listed companies which participate in that growth story as addressable markets grow to reflect the size of the growing opportunity pie.
Privatization in India has been a significant part of economic reforms since the early 1990s. The process involves transferring ownership, management, and control of public sector enterprises to private entities. India’s landscape is also highly aspirational and entrepreneurial. To reflect this India has a vibrant startup ecosystem and is now home to 116 unicorns (companies which have risen to US$1bn in valuation). From listed companies to unicorns, India’s growth story can be captured by long-term, patient investors.
We foresee India’s growth to be superior to other geographies for at least the next two decades which should lead to strong corporate profit growth and therefore equity market returns.
Source: IMF, Refinitiv and MSCI
Source: MSCI
Over time, India has had lower correlation to equity markets relative to Emerging Markets. So, adding Indian equities (one country) has improved the risk-return metrics of global share portfolios compared to adding Emerging Market equities (25 countries). This doesn’t seem to make intuitive sense but is due to India’s growth being driven more from local demand and the services sector, rather than export / manufacturing driven growth.
India is also a commodity importer, whereas countries like Australia and New Zealand are commodity exporters. Thus, investors whose portfolios are AUD or NZD domiciled in particular, are likely to benefit from including Indian equities as part of portfolios in comparison to adding Emerging Market equities (which tend to have a high representation of commodity / exporters i.e. Korea, China, Taiwan, South Africa, Middle East).
