The long-term outlook for India’s economy

India has certainly come a long way in recent years – and its progress has made it an increasingly attractive option for investors with longer-term goals. Last year, the India stock market was one of the few to post positive returns. While 2023 has so far proved more challenging, the long term outlook is encouraging.

The country benefits from strong demographics, good growth prospects, solid corporate governance and relatively few geopolitical concerns. It’s also pulled a substantial portion of its population out of poverty over the last two decades, according to Peeyush Mittal, who manages the India strategy at Matthews Asia. “We at Matthews remain confident of the strides India is making in developing the manufacturing ecosystem in the country,” he said in a recent country analysis.

Infrastructure improvements

While Peeyush warned there may be short-term hiccups, he believes long-term manufacturing growth in India is likely to remain higher, for longer. “India’s central and state governments are actively trying to resolve the challenges that have deterred foreign investments in manufacturing in the past,” he said.

He pointed out that the central government’s focus on improving road and rail logistics is aimed at reducing the cost of logistics to manufacture in India. “Similarly, many state governments are creating ‘land banks’ which can in turn be made available to corporations to establish manufacturing plants or factories without substantial delays in the land acquisition process,” he added.

Demonstrated resilience

India’s economy has demonstrated resilience – despite a challenging external environment, according to a World Bank report entitled: ‘Navigating the Storm’. It said the country’s economy was “relatively well positioned” to weather global problems and forecast it would grow at a slightly lower rate of 6.6% in the 2023-24 fiscal year.

The fact it has a large domestic market and less exposure to international trade flows, means it’s more insulated from “global spillovers” than other emerging markets. Auguste Tano Kouame, the World Bank’s country director in India, said: “India’s economy has been remarkably resilient to the deteriorating external environment, and strong macroeconomic fundamentals have placed it in good stead compared to other emerging market economies.”

View of the IMF

In a media roundtable in mid-January 2023, Kristalina Georgieva, managing director of the International Monetary Fund, also highlighted areas of positivity for India. “What you see as working extremely well for India is how the country has taken digitalisation that was accelerated by COVID to be a strong comparative advantage, both for public policy and for private sector growth,” she said.

In addition, she pointed out that “painful reforms” adopted by India were paying off, but warned it faced difficulties on the climate front. “Very dramatic impact on agriculture because of a very severe variability of climate shocks, especially droughts, high temperatures,” she noted.

How to get exposure

There are a number of ways in which to get exposure to India. The most direct route is buying a fund that’s totally focused on investing in the country. Alternatively, you could opt for an emerging market or global portfolio that invests in India, alongside a number of other places. The latter option would be preferrable if you wanted more diluted Indian exposure. To help you decide, here are three suggestions:

Goldman Sachs India Equity Portfolio

If you want pure exposure to the country, then the Goldman Sachs India Equity Portfolio could be worth considering. The fund aims to provide long-term capital growth and is broadly diversified with more than 100 holdings that hail from a wide variety of sectors.

Hiren Dasani, who has been managing the fund for almost a decade, has built up a very good and consistent track record over this period. His investment process involves evaluating the attractiveness of a company’s industry before focusing on the valuation of individual businesses.

Financials currently has the highest weighting of 26.9%, followed by 14.2% in information technology, 12% in materials and 11.4% in consumer discretionary*. ICICI Bank, the leading financial services company, is the largest holding with 7.5%*. It’s followed by Infosys, the digital services and consulting business*.

Federated Hermes Global Emerging Markets SMID Equity

India currently accounts for the largest country exposure of 21.4%* in the Federated Hermes Global Emerging Markets SMID Equity fund. The portfolio, which is managed by Kunjal Gala, also has exposure to other areas, such as China, Taiwan, Korea, Malaysia, Mexico, and South Africa.

Originally launched in 2018, the fund focuses on small and medium-sized companies, with good long term prospects, in countries that are supportive of growth. India’s expanding domestic market means it can cope a global recession better than other emerging markets, according to James Cook, head of global emerging markets at Federated Hermes Limited “In the longer term, China’s decoupling with the US may also pave the way for Indian firms to boost their presence worldwide,” he wrote in an update.

JPM Asia Growth

You can also get exposure to India via a fund in the IA Asia Pacific excluding Japan sector. One option if you go down this route is JPM Asia Growth, managed by Joanna Kwok and Mark Davids. The fund invests most of its assets in a growth-biased portfolio of companies from these regions.

Asia’s growing middle class is one of the driving forces behind the fund, resulting in lifestyle upgrades, increasing demand for savings products, and demographic changes. The investment partnership at the helm embraces a fundamental, bottom-up stock selection process that uses a high conviction approach to finding the best ideas.

High quality companies with superior – and sustainable – growth potential are favoured, while there is a diversified spread of countries and sectors. India has the second largest country exposure of 17.7%, trailing the 34% of China*. Other exposures include Taiwan, Hong Kong, Korea, Indonesia, and Singapore*.

*Source: fund factsheet, 31 December 2022

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.