Three Minutes on India

Political stability, economic growth and structural reform have worked well recently to support India’s renowned strengths, such as its entrepreneurial culture and sector specialisms like IT and pharma. They have also nurtured the rapid development of India’s digital economy and global manufacturing capability which has become particularly appealing to multinationals adopting China +1 strategies. 

For equity investors, the challenge in the near term is navigating the rich valuations which have become a by-product of India’s robust markets, and getting sustainable growth at the right price. For the most part, we think the market is still driven by earnings growth tied to GDP expansion, which is a good thing, but we are seeing some disconnects opening—particularly in the small and medium cap areas where multiples as high as 50 times earnings aren’t justified in many cases.

It means fundamentals need to be looked at closely. It’s not enough to rely on tracking the indexes. That risks exposure to potential bubbles and missing out on genuine growth opportunities. To successfully invest in India requires local knowledge and a historical perspective as well as an understanding of how India companies serve and interact with their domestic and overseas markets and partners.

The Election and Beyond

As we approach India’s general election in spring, many observers think we could see a rally in Indian equities. We aren’t convinced. We think a re-election victory for Prime Minister Modi is pretty much priced in. Still, we think we will continue to see good performance from businesses involved in government infrastructure programs and in health care, from contract development manufacturing organizations (CDMO)—which provide outsourcing services to biotech and pharmaceutical firms—and from domestic pharma companies. 

Post the election, should Modi win a third term, we could well see a broad rally in anticipation of more of the political stability and pro-business posture that have been the hallmarks of the Modi government since it took office in 2014.  

Longer term, we see big opportunities in manufacturing, particularly from more small sub-sectors participating. Telecom equipment companies, for example, are generating more demand from developed markets and we see the aerospace supply chain slowly but surely shifting to India. 

The second theme where there’s lots of excitement on the ground is renewable energy, on the back of the government's mandate and the private sector adopting more green energy initiatives. The third theme we like is financials, which we think may perform better later in the year as liquidity constraints disappear. We think some quality companies in this sector could substantially re-rate on the higher side.

Knowing India 

When we look at India, we see a market that is perhaps unrivaled in terms of its structural and secular tailwinds. It is also a nation of confidence (in contrast to China). More of its large, young working population are beneficiaries of higher education and increasingly see themselves as architects of their own destinies and prosperity. That is a powerful economic force. And for international investors, India’s neutral positioning on the geopolitical stage is arguably its biggest appeal. 

When we put all these elements together, the long-term opportunities of India seem clear. And that makes mapping out the investment journey all the more important.

Peeyush Mittal
Portfolio Manager
Matthews Asia