Emerging Market Investing – part 1 The magic  of India

By JOHN WESTWOOD  [email protected]

John Westwood is the Managing Director of Blacktower Financial Management Group

Let’s examine the investment opportunities in the world’s largest democracy.

India already has the fourth largest economy in the world using the scale of purchasing power. Further, it is one of the top 10 stock markets by market capitalisation and remains one of the fastest-growing major economies in the world.

Moving slowly but steadily forward, India is becoming a destination of choice for investors. Its economy has grown rapidly since 1991, when reforms opened the economy to international trade and investment. Over the last decade, the average annual GDP has grown to over 6.5 per cent despite events like the Asian currency crisis and the recent global credit crunch.

Recently, voters returned the United Progressive Alliance to power with a greater majority and belief in the stability, prosperity and equitable growth promised by the Prime Minister, Dr. Manmohan Singh.

Although the budget didn’t reduce India’s fiscal deficit (the Senex, India’s stock exchange, fell close to six per cent on the day it was announced), it is believed that the focus on inclusive economic growth will benefit the economy in the long run.  The latest budget addressed two main themes.

Domestic consumption

India has a young population. The UN estimates that almost a fourth of the world’s additional workforce will be added in India over the next five years. India’s economic resilience stems from the fact that its domestic consumption is a significant component of the GDP. This is likely to increase even further as we expect Indian urbanisation to increase to 38 per cent in the next 30 years.

The rural consumers will also have more money in their hands thanks to various measures taken by the government, such as increased allocation to the National Rural Employment Guarantee Act (NREGA) of 2006 (which has so far provided incomes to 40.47 million households in India) and the hike in minimum support prices for paddy and pulses, home grown agriculture.


Investment in infrastructure is planned to increase to nine per cent of GDP by 2014, as against 4.6 per cent of GDP in 2008. To meet this target, the government is attracting private capital through the public-private partnership (PPP) model. As a result, various sectors like power, railways, telecom, irrigation, urban infrastructure, aviation, water management, and so on, will gather momentum.

While top line growth was muted, there was a positive surprise in company margins.  Analysis of the net profit of the top 30 Sensex firms in Q1 shower that their bottom line-rose, on average, 36 per cent over the year-ago period, after three quarters of weak earnings. The infrastructure index, an index of six core industries, registered a year-on-year growth of 7.8 per cent in June 2009, the highest in the last 21 months.

Inside view

The potential for Indian growth looks attractive, however, the swings in fortune that the Indian equity markets have seen can make investing here seem daunting.

A number of high quality fund managers specialising in India have maintained a large ‘on the ground’ presence which means these specialist investment groups have a unique understanding of the opportunities available to investors.

Further, the new government’s approach to reform and fiscal stimulus is likely to create a stronger Indian economy. Growth should increase over the next two to three years, as India has a strong macro positioning and a solid demand story influenced by domestic factors and powerful demographics compared to its peers.  However, like most emerging markets, investments in India are subject to various risks, including geopolitical risks, variable liquidity and exchange rate risks to name a few.

However, it seems hard to understand how any growth portfolio cannot have exposure to this fascinating and potentially rewarding market. Our bar chart illustrates this point in general.

While globalisation and India’s position as a relatively low cost exporter have contributed to its improving fortunes, India’s gross domestic product (GDP) shows that its economy is far less dependent on export than many of its peers in Asia.

Much of India’s ring prosperity can be attributed to the burgeoning domestic economy, with a fast growing middle class. The past decade has seen a market shift in spending habits on the Indian population and disposal income has risen and increasing numbers of people are elevated from poverty. India’s transmission from a rural economy to an industrial nation has attracted attention. As per China’s story nearly 10 years ago, this transmission has still not received the investment research afforded to developing markets.

A vital component of a global portfolio  

The strong economic growth of emerging markets in general has led to their outperformance, and their gradually increasing share in any properly constructed global portfolio seem essential.

With economic macro-indicators gathering momentum and a strong, stable government in place, we believe Indian markets should be a meaningful component of a global investor’s portfolio.

Blacktower Financial Management Group – Telephone 289 355 685.