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Special report: Investing in India

Important - The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice, if you are unsure of the suitability of an investment for your circumstances please contact us for personal advice. Once held in a SIPP money is not usually accessible until age 55 (rising to 57 in 2028).


Kate Marshall

Investment Analyst

India: the world's next economic powerhouse

Analyst Kate Marshall explains why she believes investors should consider exposure to India.

India is a heady mix of striking landscapes, mouth-watering cuisine and bustling marketplaces. Beyond its diverse culture and time-honoured traditions, the world’s second most-populous country offers vast investment potential.

2014 was a real turning point for a more successful India. The country elected pro-business leader Narendra Modi as its new prime minister, and the world cheered his plans for change. Modi was viewed as a ray of hope not only within India, but across the globe, as he vowed to set the country on the road to economic success and create a business-friendly environment.

Most recently Modi has made efforts to crack down on corruption and tax avoidance, by removing most of India’s cash from circulation. This is expected to help the country’s transition into a modern-day economy, with consumers and businesses set to increasingly make use of banks and digital payments.

Steps have also been made to simplify India’s complicated tax system. A single national rate of tax on goods and services is due to be implemented this summer and the benefits are expected to be huge and far-reaching. Not only should it increase central government tax revenues, but also lower company logistics costs and improve efficiency.

The key to growth

A rapidly growing labour force is key to India’s growth. While many other markets will see their labour forces shrink over the coming years, India’s is set to grow exponentially. 65% of the country’s population is of working age, which makes it one of the youngest in the world. The labour force is getting more productive too, driven by urbanisation and a move away from agriculture.

While implementing economic and political reform will take time, India is already home to an array of world-class companies and entrepreneurs. The performance of the Indian stock market has been exceptional over the long term and outpaced the return from the broader emerging markets, although this has been delivered alongside higher levels of volatility, and as ever past performance is not a guide to future returns.

The market has been particularly strong over the past year, but despite this our analysis suggests it isn't expensive and we feel it could have further to run, though there are no guarantees. In our view the long-term prospects look promising, though like all emerging markets India is higher risk.

How to tap into India’s potential

We feel investors seeking exposure to India’s growth potential are best placed with a proven stock picker. There are few options available to UK investors who are seeking pure exposure to Indian companies, and fewer still are run by fund managers with long-term records of adding value. Our favoured choice is the Jupiter India Fund, along with two diversified emerging markets funds with large weightings in the Indian market.

3 fund ideas for investing in India

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Indian economy set to become world’s second largest

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Ben Brettell

Senior Economist

Indian economy set to become world’s second largest

Economic growth in India continues apace, and with the political climate appearing stable in the world’s largest democracy, the future looks bright.

India is currently the world’s fastest-growing major economy, predicted to overtake the US and become the world’s second-largest after China. India accounted for around 7% of world GDP in 2015, but this is forecast to reach 15% by 2050. Growth on this scale looks increasingly difficult for investors to ignore.

Forecast GDP (purchasing power parity, US$ trillions)

India's GDP

Source: PWC, the world in 2050

A second term as prime minister for Narendra Modi looks increasingly likely, potentially meaning at least seven years of political stability. This would give Modi a renewed mandate to press on with his ambitious programme of reforms, which aim to increase the ease of doing business and hasten India’s transition to a modern, consumer-led economy.

The rise of the middle-class consumer

Consumer spending in India is rising quickly, driven by rising incomes. By 2040, it’s predicted that nine out of ten Indians will belong to the ‘global middle class’. Consumer sector growth is forecast to accelerate to 7.1% per year in 2021-2025.

With 440m millennials, and 7m graduates every year, India’s consumer story looks set to be driven by a young, tech-savvy population. It has the fastest-growing smartphone market in the world, with subscriptions expected to increase four-fold from 210m in 2015 to 810m in 2021.

India has the highest percentage of internet use via mobile phones of any G20 nation, and the size of the mobile commerce market is predicted to grow a staggering 850% between 2015 and 2019. When Flipcart, the country’s leading online retailer, launched its new mobile website, the proportion of transactions made via mobile jumped from 15% to 70% in a year. It seems India has largely skipped e-commerce and moved straight on to m-commerce.

G20 - percentage of internet usage via mobile

G20 - use of internet usage via mobile

Source: Economic Times, Feb 2017

The demographic dividend

With 65% of India’s population born after 1980, India seems to be in a demographic sweet spot. Over the next three decades, the UN projects that India’s working-age population will grow by a third. Countries with large working age populations tend to have more dynamic, entrepreneurial economies, and there are fewer dependents for the economy and government to support.

A large working-age population is an advantage for both the manufacturing and services sectors in India. Not only do businesses have access to people that are young, physically fit and increasingly well-educated, it means fewer cost pressures as firms can choose from a large pool of available workers.

The challenges

Naturally there are risks to this positive outlook. A young workforce is only likely to be of benefit if sufficient jobs and opportunities can be generated. This could prove challenging, especially given that India’s growth looks set to be based on the less labour-intensive services sector, which receives the majority of foreign direct investment. Outdated and cumbersome labour regulations also serve as an impediment to job creation.

Conclusion

Overall the future looks bright for the Indian economy as it continues to modernise and embrace technology. Incomes are set to increase sharply, from a low base, and this should create huge opportunities for a variety of consumer industries, from baby products and personal care to scooters and SUVs.

Challenges lie ahead but there can be no doubt that India will play an ever larger role on the world economic stage in the decades to come. Global investors will increasingly have to take notice, though they must remember this is a higher-risk market. In my view omitting the world’s fastest growing major economy from a portfolio is a big call to make.

3 fund ideas for investing in India


Avinash Vazirani

Jupiter India Fund Manager

Five reasons to invest in India

Avinash Vazirani, manager of the Jupiter India Fund looks at five factors which could drive the profitability of Indian companies.

India has great potential for growth and there is a wide range of opportunities for stock-pickers. In my view, there are five main factors that will drive the long term profitability of Indian companies and which are currently under-appreciated by the market.

  • Political stability

    India’s latest round of state elections saw a good set of results for Prime Minister Modi’s Bharatiya Janata Party. This is a welcome sign of political stability from which India stands to benefit, as it shows the public is behind Modi’s ongoing regulatory reforms.

  • Introduction of direct benefit transfers

    The government is moving away from subsidies towards a system of direct benefit transfers (DBT), where benefits are deposited directly into recipients’ bank accounts. This has all been made possible by India’s universal biometric ID card scheme, under which 99% of India’s adult population has now been registered. This will save the government money, lead to an increase in consumption and encourage those on low incomes to join the formal banking system.

  • Introduction of a country-wide goods and services tax

    India currently has a patchwork of state goods and services taxes, which from July will be combined into a single tax regime. Not only should this increase central government tax revenues, but it should also provide a major drive towards the formalisation of the economy and lower company logistics costs, vastly increasing efficiency.

  • Increasing access to high-speed internet

    We have seen an inflection point in internet usage in India, as price competition has encouraged the proliferation of mobile data. One telecom provider recently disclosed that its 100m subscribers use on average around 10 GB of data per month. 76% of users now access the internet through mobile data.

  • Shift from physical to financial savings

    Demonetisation has encouraged people to deposit cash into the banking system, meaning people are now shifting wealth from physical assets, such as property and gold, to financial assets. Banks have seen a significant increase in deposits, domestic mutual funds have seen record inflows and life insurance sales were up 25% in January and February, year on year.

The existence of even one of these factors would be positive, so the convergence of all five factors means that this is the most exciting long-term investment environment I have seen in my 22 years of investing in India. In the short term I expect some uncertainty due to demonetisation and the impending implementation of the goods and services tax, but I am extremely positive both on the long-term trajectory of the Indian economy and on the profitability of the businesses I hold in the fund.

3 fund ideas for investing in India

Kate Marshall

Fund Analyst

Investment idea

Jupiter India

  • Our favoured choice for pure exposure to India
  • Manager Avinash Vazirani has a stellar track record spanning more than two decades
  • Strong stock selection has helped the fund significantly outperform its benchmark since launch, though past performance is not a guide to future returns

With a track record spanning more than two decades, Avinash Vazirani is one of the UK’s most experienced Indian fund managers.

When deciding where to invest he first considers the wider economic environment and changes afoot that could affect an entire industry and the businesses within it. In his view the government’s bold and decisive measures are positive for India’s long-term development. While there will be some short-term uncertainty, he feels removing cash from the economy and implementing tax reform will lead to increased profits. Banks, a number of which feature in the fund, could benefit as the way taxes are paid and savings are made are formalised.

He also places emphasis on the prospects for individual companies. He favours companies with strong cash flows, run by good management teams, which can be purchased at a reasonable price. He seeks those with superior growth prospects that he believes have been overlooked by other investors.

The fund has tended to hold a bias towards higher-risk small and medium-sized companies, which we feel has added value over time. The main measure of India’s stock market contains almost 80 larger companies and most other funds focus their efforts here. In contrast, Avinash Vazirani hunts for opportunities off the beaten track and smaller businesses with greater growth prospects. This positioning differentiates the fund from many of its peers and we believe it offers greater potential for long-term outperformance.

The approach has proven a success so far. Since launch in February 2008 the fund has grown 190.7% compared with 90.5% for the FTSE India Index. Please remember past performance is not a guide to future returns and as the chart shows the fund can fall as well as rise in value, so investors could make a loss. We believe Avinash Vazirani has the skill and experience to harness the exciting growth opportunities India has to offer and this fund is our favourite for direct exposure to this higher risk area.

Jupiter India - performance since launch

Jupiter India performance chart

Past performance is not a guide to future returns

Source: Lipper IM, 29/02/08 - 31/03/17

Annual % growth March 12-13 March 13-14 March 14-15 March 15-16 March 16-17
Jupiter India 0.7 -5.1 59.2 -4.9 52.9
FTSE India 6.2 -2.4 40.8 -8.7 41.2

Fund information

Investment goal: Growth
Net initial charge: 0.00%
Ongoing charge (OCF/TER): 1.06% p.a.
Ongoing saving from HL: 0.37% p.a.
Net ongoing charge: 0.69% p.a.
Vantage Service Charge: 0.45% p.a.
Maximum overall charge: 1.14% p.a.

View Key Investor Information Document

View our charges

Invest in Jupiter India

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Investment idea

Stewart Investors Asia Pacific Leaders

  • Broader exposure to Asian markets, and well-positioned to take advantage of growth in India
  • Focus on high-quality, cash-generative companies with strong balance sheets
  • Management team have a superb track record of identifying the best opportunities across the region

Investors might also consider broader exposure to the exciting Asian region for balance and diversification. The Stewart Investors Asia Pacific Leaders Fund invests across eastern economies, and is also primed to take advantage of India’s economic overhaul.

Indian companies are well-represented and currently comprise almost one third of the portfolio. Many are well-managed, family-owned companies that align their interests with shareholders. Current investments include technology firm Tata Consultancy Services and Kotak Mahindra Bank.

The team tend to focus on high-quality, cash-generative companies with strong balance sheets and sound business models. They also view the sustainability of a business as key; they favour those that are positioned to benefit from the sustainable development of the countries in which they operate, with a focus on environmental, social and corporate governance matters.

The team’s prudent investment approach has worked remarkably well over the long term and they have built an exceptional track record investing in Asian companies. Since launch in 2003, the fund has delivered growth of 524%, compared to 334% for the sector average. Past performance is not a guide to future returns; the fund will fall as well as rise in value so you could get back less than you invest.

Our analysis indicates the team’s talent stems from strong stock-picking ability. The fund has tended to offer some shelter in times of market falls, but has also captured a good proportion of growth when they are rising. We feel this fund represents an excellent choice for broad exposure to this exciting but higher-risk region.

Stewart Investors Asia Pacific Leaders Geographical Breakdown

Stewart Investors Asia Pacific Leaders performance chart

Source: Stewart Investors as at 31/03/17

Annual % growth March 12-13 March 13-14 March 14-15 March 15-16 March 16-17
Stewart Investors Asia Pacific Leaders 19.1 -6.7 30.3 -5.1 25.2
Sector average 16.9 -6.7 19.5 -7.4 35.4

Past performance is not a guide to future returns

Source: Lipper IM, 31/03/12 - 31/03/17

Fund information

Investment goal: Growth
Net initial charge: 0.00%
Ongoing charge (OCF/TER): 0.91% p.a.
Ongoing saving from HL*: 0.05% p.a.
Net ongoing charge: 0.86% p.a.
Vantage Service Charge: 0.45% p.a.
Maximum overall charge: 1.31% p.a.

* This saving is delivered via a loyalty bonus, which may be subject to tax outside an ISA or SIPP.

View Key Investor Information Document

View our charges

Invest in Stewart Investors Asia Pacific Leaders

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Investment idea

HL Multi-Manager Asia & Emerging Markets

  • A solution for investors who want to leave the underlying fund selection to our experts
  • Currently 14% invested in India
  • Run by our sister company HL Fund Managers Ltd

For investors seeking wider exposure to both Asian and emerging markets, or investing in this higher-risk area for the first time, the HL Multi-Manager Asia & Emerging Markets Fund could be a solution. Different countries and types of company will perform well at different times, and choosing from the array of funds available can be difficult for even the most seasoned investor. That’s why some investors may wish to leave these decisions to an experienced hand to make the decisions on their behalf.

The HL Multi-Manager Asia & Emerging Markets Fund is overseen by our in-house team of experts who spend their days seeking the very best managers investing across these markets. They monitor performance and make changes to the portfolio when necessary, taking the hassle and worry away from investors. We feel the benefits this brings more than justifies the additional costs associated with a multi-manager approach. The fund is diversified both geographically and across companies of different sizes – including exposure to higher risk smaller companies to boost growth potential. Like all investments it will fall as well as rise in value so you could get back less than you invest.

The fund is positioned to benefit from India’s exciting long-term growth potential. India is currently the portfolio’s largest country exposure with 14% invested there. We feel this fund could provide core exposure to this vast and diverse region.

Fund information

Investment goal: Growth
Net initial charge: 0.00%
Ongoing charge (OCF/TER): 1.65% p.a.
Ongoing saving from HL: 0.00% p.a.
Net ongoing charge: 1.65% p.a.
Vantage Service Charge: 0.45% p.a.

View Fund Key Features

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Invest in HL Multi-Manager Asia & Emerging Markets

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George Salmon

Equity Analyst

India - a share in the world’s fastest growing economy

1.3bn reasons why these UK companies are looking to India for growth

India is the world’s fastest growing major economy. With a population of 1.3bn people, this means a significant uplift in wealth for over 17% of the world’s population.

A larger, wealthier population creates huge opportunities for companies with established positions in India. Consumption of goods and services is only likely to increase, while higher disposable incomes create opportunities to upgrade customers to premium products. Below, I assess three UK companies with high-profile Indian operations. Like all stock market investments, their shares will fall as well as rise so invetors could make a loss.

A more premium mix

Guiness

Diageo, owner of brands such as Johnnie Walker, Guinness and Smirnoff, is a great example of a UK company with plenty of potential to succeed in India.

It may only account for around 9% of revenues at the moment, but the Indian market is among Diageo’s most promising. The company expects its addressable market to grow by 18-19m people a year. Net sales growth at the interim stage was 4%, impressive given the upheaval caused by the government scrapping high value notes.

Diageo’s £1.6bn marketing budget ensures its brands are pitched a cut above the local offerings. This not only ensures its products command high prices, but also that the group is plugged into an expanding middle class.

Diageo has an enviable record of dividend increases stretching back to the 1990s. Its world-class stable of brands, combined with an exposure to emerging markets like India, mean we wouldn’t be surprised to see this record continue, although of course there are no guarantees.

View our Diageo factsheet

For all its strengths, investors shouldn’t assume exposure to India is a one-way street to riches. While many UK listed companies have exposure to India, the sub-continent’s contribution to group profits is often small, meaning even rapid growth will do little to move the dial at group level. Even among those companies with meaningful exposure there are no guarantees of success.

Two UK names that leap to mind when talking about India are Vodafone and Vedanta Resources. Both have the potential to benefit from the economic surge, but both are also proof that a growing market doesn’t guarantee success.

The raw materials for 7% growth

Vedanta

Vedanta is a mining and oil & gas conglomerate, and although it has operations across the world, the majority are in India. Operations include iron, copper and zinc mines as well as oil & gas fields and aluminium smelters. It recently completed a merger with its Indian oil & gas subsidiary, Cairn India.

As with all natural resources, the price of what Vedanta produces is largely set by the market. However, Narendra Modi has said he expects to increase infrastructure spending to around $1.5tn in the next decade. That brings increased demand for raw materials. The government has sought to encourage increased local production by reducing burdens on domestic producers. Vedanta has already been a beneficiary.

However, as with any company, investors should look at more than a favourable backdrop. The group operates a hugely complicated corporate structure, with multiple layers of partially owned subsidiaries. Combined with Chairman Anil Agarwal’s 68% shareholding, this has raised concerns about corporate governance in the past, a common story in emerging markets.

View our Vedanta Resources factsheet

The race to connect 1.3bn people

Vodafone

Mobile phones are firmly established as India’s primary means of communication. Combined with rapid economic growth it’s easy to see why Vodafone invested heavily, entering the market in 2007. Over the last five years Vodafone has added an average of over 12m new customers a year and last year 11% of revenue came from India.

However, Vodafone isn’t alone in spotting the opportunity. Jio, a new network with the backing of the mighty Reliance Industries, has spent over $25bn on infrastructure, and customers flocked to sign up, drawn by the offer of six months of free data. Vodafone was forced into a €5bn write-down of its Indian business.

Going forward, Vodafone’s Indian business will be split from the main group, instead being reported as a subsidiary. $8.2bn of debt will come off the balance sheet, helpful given that net debt has expanded to €37bn, close to three times earnings before interest, tax, depreciation and amortisation.

View our Vodafone factsheet

Other options?

There are relatively few UK companies with significant exposure to India, and those that do often require detailed scrutiny. That could leave investors looking for broader exposure to the Indian economy scratching their heads. To help, our research team has highlighted an Indian focused fund for those willing to take on the extra risk of emerging market investments in exchange for the potential rewards India can offer. They also suggest two options for investors seeking broader emerging market exposure.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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