Leaders of major global agencies, banks, and corporations have spoken about the long-term positive views on India, writes Ayush Abhijeet of the Ashoka India Equity Investment Trust.
With a rather gloomy global backdrop where most countries are reeling from the effects of high inflation and weakening external sector, India’s macro fundamentals are perceived by consensus to be on a stronger footing than its peers.
The collective expectations seem to suggest that India’s economy could emerge as a material outperformer in terms of growth over the next decade.
Yet, the discerning readers and investors will have a few questions, the major ones being what has led to the recent upsurge in the ‘India story’ gaining prominence and what are the attractive pockets of opportunity from an investing perspective?
The ‘India story’ gaining prominence
Our long-held belief has been that India offers a once-in-an-era, multi-generational investment opportunity as it marches towards being the third largest economy by 2030, aided by structural levers such as favourable demographics, rapidly increasing digitisation, formalisation, and policy shift to boost manufacturing. In the recent past, the government initiated several supply-side reforms to improve the ease of doing business.
Multiple disruptions over the last couple of years, such as Covid and geo-political tensions have underscored the importance of global supply chain reorientations, and in this regard the recent push towards ‘Make in India’ seems to be working as intended, with many global brands setting up production facilities in India.
Macroeconomic conditions in India have also remained very stable and benign. Inflation has largely remained under control due to the government’s focus on a capex-led fiscal stimulus instead of boosting consumption post-Covid, as well as a faster pace of vaccination ensuring labour availability and a check on wage growth.
India’s healthy forex reserves have also helped counter imported inflation through higher oil prices, thus providing support to the Indian Rupee. Furthermore, an underappreciated aspect is that the vulnerability of macro variables due to a higher oil import bill has reduced materially over the years owing to India’s faster economic growth and rising exports compared to the oil consumption.
One of the most understated factors that has gained importance in recent times, is that India possesses the soft infrastructure of a mature, stable democracy with strong separation of powers – between the executive, legislature, and judiciary. It has an independent central bank and there is rule of law with strong protection and enforcement of property rights.
Having seen emerging markets up close over the last three decades, our seasoned team believes that this institutional separation of powers – effectively a system of checks and balances – and efficient execution of contracts is a crucial attribute that makes India attractive compared to several other emerging markets. From time to time, emerging economies’ investments are subject to appropriation risks as well as macroeconomic and political instability.
Such risks are far lower in India given its robust ‘soft infrastructure’. This and several other reasons, including lower government ownership of listed companies has meant that it has always commanded a higher valuation premium to EMs – and this has further expanded with the unfolding of global events this past year.
Fertile hunting ground for bottom-up stock selection
To our minds, at Ashoka India Equity Investment Trust and more broadly White Oak, the most exciting aspect of investing in India is its high alpha generation potential compared to any sizeable equity market around the world for bottom-up stock pickers.
Within EMs, India has a heterogeneous investible universe with the most diversified exposure to sectors. It also has a vast under-researched mid- and small-cap segment. These present a fertile ground for stock selection and alpha generation.
Moreover, the opportunity set has only expanded recently as new initial public offerings have led to the emergence of sub-sectors of industries which hitherto was available only to private investors.
The beauty of India’s stock market lies in the fact that it offers enough alternatives for investors to decouple their investments from any macro theme. To better explain this point, it would be worthwhile to note that almost a quarter of the stocks within the BSE-500, the broader index, have delivered in excess of 20% Cagr returns over the last two decades.
This is a staggering proportion and is far higher than many other large investible markets worldwide. Importantly they are spread across cyclicals (banks, consumer discretionary) and defensives (IT services, healthcare) – in our view, this provides evidence that an investment approach which leans towards one particular theme or sector through top-down macro assessments may not be the best template for investing in India.
We see exciting opportunities across sectors such as private sector financials, consumer discretionary, healthcare, IT services, materials, and industrials. These sectors typically are heterogenous and have diverse business models, thereby acting as fertile hunting grounds for alpha generation.
Well-run private sector banks with strong execution capabilities continue to gain market share from poorly run government-owned banks, which account for two-thirds of the industry, both on loans and deposits. Niche businesses in the consumer discretionary sector offer ample runway for growth as many consumption categories can grow disproportionately with rising incomes.
Meanwhile, IT services present many opportunities as Indian companies emerge as leaders in deploying Cloud-based technologies to global enterprises.
Summary
India is projected to be the fastest growing major economy in the world. Due to its strong fundamentals, structural growth drivers intact, as well as a reformist government, the stage is set for a bigger economic upcycle over the next decade.
Additionally, the Indian equity market being very dynamic, inefficient, and well-diversified offers a large alpha opportunity.
As India equity specialists with a very well-resourced investment team, we continue to focus on investing in strong businesses, while maintaining a highly disciplined cash-flow-centric valuation approach.
This article was written for International Adviser by Ayush Abhijeet of the Ashoka India Equity Investment Trust.
