3 comments | Includes: INCO, INXX, SCIN
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Summary
- Since the May 2014 election of Prime Minister Narendra Modi, India has outperformed other emerging markets in response to a strong reform agenda1.
- Reasons investors should consider India include reforms, GDP growth, fiscal discipline, earnings growth and favorable valuations.
- Investors considering equity allocations to India should keep in mind potential growth in the consumer, infrastructure, and economically sensitive companies, such as small cap companies.
Since the historic election of Indian Prime Minister Narendra Modi last May, India's market has shown few signs of slowing down. In 2014, India was the best-performing emerging market, up more than 29%, and it continues to outperform this year as well.2 We believe the market has responded favorably to the robust agenda of reform under the Modi administration, as many believe his policies will enhance India's economic potential.
There are numerous reasons why investors should consider India now and over the long term. Here, we highlight the five key reasons to invest in India right now.
1. Reforms matter
Those emerging market countries that are actively undertaking reform, which we call the "Fab Five" (India, Indonesia, Mexico, Philippines and China), are expected to revive economic growth. Investors are eager to see reforms carried out as a growth catalyst and have rewarded countries such as India (see Figure 1).
The reforms put forth by the new Indian government under Prime Minister Modi intend to privatize state assets (especially the financials and power sectors), increase foreign direct investment, reduce the fiscal deficit by cutting subsidies, deregulate the labor market, upgrade infrastructure and reform the tax regime. We believe these improvements should unleash investment, increase efficiency, raise productivity and boost growth.
2. Favorable demographics and Gross Domestic Product [GDP] growth
The world's largest democracy, India is home to 1.25 billion people, with more than 65% of the population younger than 35. By 2025, India is projected to be the world's most populous country with almost 1.4 billion people. In addition to its population, India's total labor force will continue to grow relatively quickly, by about 1.5% annually. By 2030, there will be about 174 million net new members of the country's labor force.4
Furthermore, India's GDP is expected to expand more this year, and is forecasted to be 6.3%, compared to 4.3% in emerging and developing economies (see Figure 2).5 By 2016, India's GDP is expected to surpass China's. Today, growth opportunities are very scarce within emerging markets and India is a rare growth opportunity for investors.
3. Fiscal and monetary discipline
The lower price of oil and better fiscal management, including cutting government subsidies, are helping to reduce India's fiscal deficit. India is also focused on managing inflation, which helps the central bank to lower interest rates (see Figure 3). In particular, a strengthening rupee prevents the erosion of return for U.S. investors. Collectively, lower interest rates, lower inflation and lower commodity prices all help to put money in the pockets of consumers and accelerate domestic demand growth.
4. The growth of corporate earnings
Consensus estimates for corporate earnings in emerging markets are improving over the next two years, and estimates for India are better still. In 2016, India's earnings growth is forecasted to increase to almost 20%, up from a projected 7% in 2015 (see Figure 4). India earnings are forecasted to surpass not only the MSCI ACWI index, but also the rest of emerging markets and the MSCI EAFE Index.
5. It's not too late
India's current forward valuation levels point to sustainable growth at a reasonable price over the long term, relative to other global equity benchmarks and in relation to its own growth rate. India's valuation is only slightly above its 10-year average and similar to that of the S&P 500 Index. The country's 12-month forward price-to-earnings (P/E) ratio is about 17.4% (see Figure 5) and its price-to-earnings growth [PEG] ratio is 1.5 - in line with Taiwan and China, and arguably more attractive than energy markets as a whole.
Investment Opportunities
We believe there is an opportunity for investors to focus on three specific themes in India: domestic demand and consumption, infrastructure, and small and mid caps. These themes are among the areas of the Indian economy best poised to benefit from the Modi administration's agenda of reform.
First, India is a significant net importer of oil and a top beneficiary of low oil prices; therefore, falling prices should support domestic demand by supplying consumers with more discretionary income. To tap into this growth in consumption, investors might consider the EGShares India Consumer ETF (NYSE: INCO), with Consumer Goods comprising nearly 80% of a maximum 30-stock market cap-weighted index. The top sectors within INCO include automobiles and parts, personal goods and industrial engineering. INCO is currently the only India-focused ETF with a five-star rating from Morningstar among 16 India Equity ETFs and open-end funds as of 2/28/2015 based on risk-adjusted return.
Second, infrastructure was a significant focus of Indian Finance Minister Arun Jaitley's February 28, 2015 budget speech, where he stated India would spend an additional $11 billion on roads, railways, ports and other projects next year. The EGShares India Infrastructure Exchange-Traded Fund (NYSEMKT:ETF) (NYSE: INXX), designed to provide exposure to the anticipated growth in spending on infrastructure. The companies selected for the fund's underlying index may be positioned to benefit since they include, among other industries, construction and engineering, construction materials, independent power producers, metals and mining, and wireless telecommunications services.
Third, India's large cap companies have underperformed mid- and small-caps, highlighting the opportunity for investors to access the growth in Indian small caps. The EGShares India Small Cap ETF (NYSE: SCIN) offers targeted exposure to a maximum of 75 Indian companies with a market capitalization between $100 million and $2 billion.
Footnotes
1 Prime Minister Modi took office 5/26/2014. From 5/26/2014 - 3/12/2015, the MSCI India Index was up 19.5% compared to the broad MSCI Emerging Markets Index which was down -3.2%. Source: MSCI, Bloomberg as of 3/13/2015.
2 From 12/31/2013 - 12/31/2014, the MSCI India Index was up 23.7% compared to the broad MSCI Emerging Markets Index which was down -2.1%. From 12/31/2014 - 3/12/2015, the MSCI India Index was up 7.7% compared to the broad MSCI Emerging Markets Index which was up 3.7%. Source: MSCI, Bloomberg.
3 Source: FA Magazine, "Five Reasons to Buy India ETFs Even After Last Year's Monster Rally," January 28, 2015.
4 Ibid.
5 Source: International Monetary Fund (NYSE:IMF), WEO - October 2014; EGA.
Definitions
India Key Rate is also known as the RBI Repo Rate as all other rates can be derived from the repo rate. India WPI is the Wholesale Price Index of India and is the price of a representative basket of wholesale goods; it is used to measure inflation. Indxx India Consumer Index is a maximum 30-stock free-float adjusted market capitalization-weighted index designed to measure the market performance of companies in the consumer industry in India.Indxx India Infrastructure Index is a maximum 30-stock free-float adjusted market capitalization-weighted index designed to measure the market performance of companies in the infrastructure industry in India.Indxx India Small Cap Index is a maximum 75-stock free-float adjusted market capitalization-weighted index designed to measure the market performance of companies in the small cap segment in India. MSCI All Country World Index (NASDAQ:ACWI) captures large and mid-cap representation across 23 developed markets (NYSE:DM) and 23 emerging markets (NYSE:EM) countries. MSCI China Index captures large and mid cap representation across China H shares, B shares, Red chips and P chips. MSCI Emerging Markets Index is an index that is designed to measure the equity market performance in global emerging markets. MSCI Europe, Australasia, Far East (EAFE) Index captures large and mid-cap representation across developed markets countries around the world, excluding the U.S. and Canada. MSCI India Index is a free-float adjusted market capitalization weighted index that is designed to track the equity market performance of Indian securities listed on the National Stock Exchange and the Bombay Stock Exchange. MSCI Indonesia Index is designed to track the performance of Indonesian securities listed on the Indonesia Stock Exchange. MSCI Mexico Index is designed to measure the performance of the large and mid cap segments of the Mexican market. MSCI Philippines Index is a free-float adjusted market capitalization weighted index that is designed to track the equity market performance of Philippine securities listed on the Philippine Stock Exchange. PEG Ratio is the price to earnings ratio divided by the growth rate of its earnings for a specified time period. Price/Earnings (P/E) Ratio (Forward) is the sum of Bloomberg consensus estimates for the future 12-month earnings of the equity holdings, divided by the total market value of the equity holdings. Both positive and negative earnings are included in the calculation. S&P 500 Index is a broad-based measure of U.S. stock market performance.
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The EGShares India Consumer ETF seeks investment results that correspond (before fees and expenses) to the price and yield performance of the Indxx India Consumer Index. The EGShares India Infrastructure ETF seeks investment results that correspond (before fees and expenses) to the price and yield performance of the Indxx India Infrastructure Index. The EGShares India Small Cap ETF seeks investment results that correspond (before fees and expenses) to the price and yield performance of the Indxx India Small Cap Index.
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