For a NZ economy languishing with a GDP under 3 per cent, a 5.7 per cent growth-rate sounds like more than half a world away.
And yet half a world away a real growth rate of almost 6 per cent is viewed as a downer, according Mugunthan Siva, managing director of Sydney-headquartered India Avenue Investment Management.
Siva, on a NZ tour last week, said March quarter annualised Indian GDP result of 5.7 per cent represents a “growth recession” in the world’s second most-populous nation.
“The June quarter result will probably be in the high fives too,” he said. “Previously, the Indian economy has been growing in the high 6 to 7 per cent range. And India needs to grow at least 7 per cent to create enough jobs: 1 million Indians turn 18 every month; the economy has to create 10 million jobs each year to absorb them.”
As the economy flags, India has also been through a fractious couple of years in politics and finance.
Populist Hindu Prime Minister, Narendra Modi, claimed an increased parliamentary majority following his Bharatiya Janata Party (BJP) landslide win in this year’s general election.
The surprising strength of the BJP victory stoked fears of religious violence in the famously diverse country while ramping up tensions with Islamic neighbour, Pakistan, in the disputed Kashmir region.
Meanwhile, the India financial system has been revamped during the Modi years (he became PM in 2014) including a controversial ‘demonetisation’ program announced in 2016 to curb the cash-based shadow economy. At the same time, India introduced a GST in 2017, has recently modernised bankruptcy and insolvency laws, while sustaining high interest rates as the central bank focused on price stability.
A slowing economy further exposed weakness in the banking sector as the number of poorly-performing loans, written on the back of lax lending criteria, sky-rocketed.
Non-performing loans hit 11 per cent in 2017, although the figure dialed back to 9 per cent this year and is expected to fall a further 1 per cent next year.
But Siva said despite the current crop of bad news, India is poised to resume its previous growth trajectory, bolstered by increased support from the Modi government, a more dovish central bank and the bedding-down of financial reforms.
“The government has promised India will be a US$5 trillion economy by 2024 – now it’s just US$2.7 trillion,” he said. “To achieve that target India needs to grow by 8 per cent each year”
If India does reach the ambitious US$5 trillion GDP goal, that implies the average net worth of the sub-continent’s citizens would increase from US$2,100 to US$3,500 over the five-year period.
“That might not sound like much in nominal terms but it’s a 60 per cent increase,” Siva said.
The Indian central bank has also switched to growth mode over the last year, slashing interest rates by 1.1 per cent to the current 5.4 per cent.
“India is in a short-term cyclical downturn but the long-term structural growth story hasn’t changed,” he said.
Although the Indian stock market has yet to price in the potential, Siva said.
“And the best time to be investing in India is when there are problems, not when it’s strong,” he said. “You don’t want to be buying when Modi is on the cover of Time Magazine.”
Siva said Indian stocks, which typically trade at high multiples, are now at fair value. However, recently returns and liquidity have been highly-skewed to the top 10 companies in the index, he said.
“Over the last 18 months only the top 10 stocks have seen a positive return,” Siva said. “The Indian mid-cap index was down 29 per cent over the same period and small-caps lost 44 per cent.”
Forward-looking multiples show a “significant dispersion” has opened up between large companies and the rest of the Indian stock market, he said. A high level of dispersion favours active managers, Siva said, with plenty of opportunities now on offer in India.
“We’re investing in companies that will benefit from the next business cycle,” he said. “We’re not loading up on large stocks.”
For example, India Avenue – which manages about $35 million in an Australian unit trust – has exposure to “early stage engineering firms” and agricultural companies that are well-placed to ride the coming growth wave.
The portfolio currently holds about 60 stocks out of an investable universe of 1,000 or so (distilled from a total of 6,000 listed Indian firms). India Avenue has mandated three Indian investment managers to advise on stock selection but the ultimate strategy is decided and implemented in Australia.
Siva said the India Avenue fund – available in NZ via advisers and direct on the InvestNow platform – now has roughly a quarter invested in financials, 12 per cent in IT, 15 per cent in consumer stocks as well an exposure to car manufacturing.
Over the last 12 months the fund has returned about 8 per cent (annualised) in NZ dollar terms but underperformed the index (up 10.5 per cent).
But Siva is confident that stock-picking will be rewarded as India emerges from the relative gloom of 5.7 per cent growth to assume its true place in the world.
India Avenue is represented in NZ by The Investment Store.