India is poised to be a standout among global stock markets over the next five years, outperforming developed markets, according to Newton’s head of emerging markets, Rob Marshall-Lee.
Speaking at the press briefing yesterday, Marshall-Lee says India should be able to meet its long term growth potential thanks to positive economic reforms and its attractive demographics.
“Prime Minister Narendra Modi is making all the right reforms. He is setting the economy up for its long term future, not focusing purely on the short-term. A lot of markets get bored by that, but for us, it is really exciting,” he said.
Many emerging markets have been hit by the recent fall in oil prices – and overall emerging market performance if correlated to the performance of this commodity. But India, bucks this trend: as one of the world’s largest importers of oil it has been a net beneficiary of falling commodity prices over the past two years.
Strong Demographics Drive Indian Economic Growth
India’s population is set to grow by up to 8% annually for the next 30 years, thanks to its favourable demographics, according to Paul Sheard, chief economist at S&P Global.
India’s working age population growth is forecast to be above 20% from 2015 to 2035, the third largest growth across 24 countries, according to the United Nations population data provided by Marshall-Lee. Nigeria topped the chart with about 70% growth while Philippines came second with more than 30% growth. However strong population growth does not necessarily trigger growth in economy, depending on how policy markers react.
“Strong demographics can be a very positive thing if managed correctly. Modi has put in place all the proper labour reforms, unleashing the productivity potential,” Marshall-Lee explained.
Marshall-Lee says this strong demographic is backed by profitability growth and low levels of debt in the Indian economy. With these advantages it is perhaps not surprising that his holdings in India have outperformed by 15% compared to the general MSCI index over the past 12 months.
Marshall-Lee also likes other commodities importing countries including Philippines and China - although he only invests in education, healthcare and e-commerce sector in China thanks to the growth of consumers industries in the country.
Rise of Consumer Class
Marshall-Lee is investing in many consumer-focused stocks, which are benefitting from the growth of an emerging middle class in India.
For example he is overweight in tobacco stocks. “When people are getting more money, they are spending them on cigarettes as a luxury item. Bear in mind that in India, probably 90% of tobacco consumption are hand-rolls. So when people are getting cigarettes that’s their special treat,” he explained.
Private banks are another interesting opportunity that Marhsall-Lee sees a lot of growth potential, with high returns on equities. Private Banks are much smaller than the state-owned banks, but are growing 20-25% year-on-year, as the government has actively been encouraging growth in this sector.
Marshall-Lee also likes other consumer focused sectors, such as jewellery and cinema companies.
Foreign investment in India is also booming. In Mumbai, at the Make in India Week exposition, attended by more than 10,000 government and business delegations from 72 countries, $220 billion of investment was committed, creating jobs and boosting manufacturing, according to Kunal Desai, manager of the Neptune India Fund.
“Whilst it is debatable how much investment will materialise, we believe it goes some way to show the intent of policymakers – other emerging markets are not approaching foreign companies with this scale and coordination,” says Desai.
Brexit Less Impact on Emerging Markets
In terms of the impact on emerging markets, Marshall-Lee believes that Brexit might trigger short-term volatility in emerging markets, however he says the effect is likely to be far less marked than on developed markets.
“If Brexit was to occur, it would basically weaken sterling and euro, leading to them less attractive in their returns. But it won’t weaken emerging market currencies,” he said.
