India is back.
Despite suffering one of the worst COVID-infection rates in the world this year as a ‘second wave’ swamped the medical system, the Indian economy has rebounded sharply, according to Mugunthan Siva, head of India Avenue Management.
“It’s been a surprise for many global investors how well the Indian economy recovered,” Siva said, with GDP recouping all pre-COVID falls and more prior to the recent outbreak.
“But the second wave has only taken away about a quarter of the growth.”
While the country fell into a relative slump over 2018-2020 as the weight of reforms and new compliance measures slowed economic growth to 3.3 per cent from the previous 7 per cent, India was poised for nominal GDP close to 10 per cent over the next few years, he said.
The May update to the India Avenue Equity Fund notes: “The strong upward move witnessed in Indian equity markets since the impact of COVID-19 in March 2020 has in part been a recovery, but is also mean reversion from India’s period of languishing GDP growth (2018-2020) and corporate profitability (2010-2019).
“With lower cost of capital, abundant liquidity, increasing utilisation of capacity and a Central Bank and Government focused on growth, it is likely that markets should remain upbeat, with improving earnings and new opportunities for some companies.”
However, the good news for the Indian economy has not been evenly distributed in the COVID recovery period with certain sectors – especially globally focused businesses – outperforming compared to domestic enterprises reliant on face-to-face consumer activity.
For instance, IT (where India supplies 60 per cent of corporate outsourcing services), pharmaceuticals and automobile manufacturing (including parts) have been thriving, Siva said.
The economic resurgence has also recalibrated the Indian sharemarket (the fifth-largest in the world) that had been in lop-sided form over the previous two years.
Siva said during the fallow two-year stretch almost all of the Indian stock market returns came via the top 50 stocks.
As a growth-focused manager playing in the small- and mid-cap arena, India Avenue lagged the index over the top-heavy years, he said, but has subsequently clawed back significant gains against the benchmark. The fund invests directly into Indian shares, held by an Australian-based custodian, but uses three fund managers based in India to advise on the portfolio (of roughly 60 stocks).
For the 12 months to the end of May this year, the fund returned almost 54 per cent – or 10 per cent above the index. Since inception in 2016, India Avenue is still under par by about 2 per cent but Siva said the market was rife with a diverse range of mid-sized companies ready to capture local and global growth opportunities.
“The broadening of markets has also assisted in stronger recovery for active managers who can identify growth companies which have a steeper positive trajectory than might have been anticipated,” the May fund update says. “We are noticing several companies who provide improving or strong guidance are being re-rated upwards significantly. This reflects a positive environment for active management given dispersion between the winners and losers should increase.”
The India Avenue fund is one of a handful that offer Australasian investors a concentrated exposure to the Indian market. (But one more launched this week targeting the institutional and wholesale markets in Australia and New Zealand under a partnership between Australian third-party distributor 3PD and Indian equities manager, ValueQuest Capital.)
Typically, broader emerging market funds would allocate about 1 per cent to Indian stocks – underweighting the opportunity, Siva said.
“We think an allocation of about 3 per cent to India would allow investors to ‘front-run’ GDP growth,” he said.
And after a pause in flows during the stagnant 2018-2020 period, investors and advisers in Australia and NZ are once again showing interest in India as a stand-alone prospect.
“We’re definitely seeing more inflows,” Siva said.
The fund has about A$55 million under management, of which 15 per cent comes via NZ investors. India Avenue is available on all major adviser platforms as well as direct-to-consumers on InvestNow.
Against the developed world trend (that China will soon follow) of aging populations, India is on track to lower its ‘dependency ratio’ – essentially the proportion of retirees versus working age individuals – over the coming few years.
“India has a dependency ratio of about 46 per cent now but that will fall by the end of the decade to 35 per cent, which is the same level as China was when it began its strong run of economic growth,” he said. “About half of the Indian population is under 30.”
And while risks abound – both domestic and global – the demographics point to an India that is growing forward.