People watch results for India's general elections on a screen outside the Bombay Stock Exchange in Mumbai last month. Fund managers are encouraged by the Indian coalition government’s recent budget that balances fiscal restraint with populist policies.Francis Mascarenhas/Reuters
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India has arisen to become an emerging markets darling, but the country may not be on the radar of many Canadian retail investors.
Despite the richly valued market, fund managers are bullish longer term and are encouraged by the Indian coalition government’s recent budget that balances fiscal restraint with populist policies.
India’s NSE Nifty 50 and S&P BSE Sensex indexes hit record highs this month but have retreated amid profit-taking. The indexes have gained about 26 and 22 per cent, respectively, over the past year.
“India is still our favourite emerging market at the moment,” says Matthew Strauss, portfolio manager and lead for global equities at Toronto-based CI Global Asset Management.
“The valuations have run up, so we’re a bit cautious of what the returns will look like over six to 12 months,” says Mr. Strauss, who oversees CI Emerging Markets Fund. “We’re hoping for a pullback … to add to some of our names.”
India’s financial markets have soared since Prime Minister Narendra Modi’s Bharatiya Janata Party took power in 2014 and began instituting bold, and sometimes controversial, economic policies.
He embarked on an infrastructure boom with money pouring into rail lines and highways, digitization to improve internet access, and financialization to move the country away from a cash economy to more people holding bank accounts.
India, the world’s fifth-largest economy, has also been attracting multinationals, including Apple Inc., that embrace a “China-plus-one” strategy to reduce supply-chain risk.
But Mr. Modi’s failure to win a majority in the June 4 election raised concerns he would need to make concessions to his coalition partners, which could impede economic growth.
However, Mr. Strauss is reassured by the government’s continued focus on fiscal discipline in its first post-election budget.
“The government’s commitment to strong capital expenditure growth while bringing down the deficit over time bodes well for a structurally sound fiscal framework,” he says.
The Indian government’s recent increases to capital gains taxes from equities investments was “a negative surprise, but the reduction in gold import duties, and incremental support for job creation and upskilling, are positive developments,” he adds.
However, the Indian market, which now makes up about 19 per cent of the MSCI Emerging Markets Index, has become pricey and trades at more than 20 times forward earnings, he says.
“We were overweight India [in the fund] but, given our concerns about valuations, we took some profit and are now slightly underweight at around 18 per cent,” Mr. Strauss says.
He still finds India’s market attractive and expects its economy to grow in the 5 per cent to 7-per-cent range, depending on whether it’s in an up or down cycle. “It is already outgrowing China,” he says.
Mr. Strauss favours the financial sector, noting that banks are a “great way to gain exposure to a fast-growing economy.” His fund owns ICICI Bank Ltd. IBN-N and HDFC Bank Ltd. HDB-N.
“We continue to favour consumer discretionary over staples and companies that benefit from large capital projects,” he adds.
He likes Titan Co. Ltd., a jewellery retailer with a strong brand that will benefit from lower import duties on gold, and engineering and construction firm Larsen & Toubro Ltd. LTOUF.
His fund also holds REC Ltd., a lender to the energy industry to play India’s renewable energy push; Reliance Industries Ltd., a conglomerate involved in industries ranging from energy to retail sectors; and information technology company Infosys Ltd. INFY-N.
Regina Chi, portfolio manager with Toronto-based AGF Investments Inc., is also concerned about the Indian market’s high valuations but remains bullish for the longer term.
“It’s the world’s fastest-growing economy with very strong demographics [thanks to its young population] and geopolitical tailwinds,” says Ms. Chi, who runs AGF Emerging Markets Fund.
“India is seeing very robust momentum with 8.2 per cent real [gross domestic product] growth [in fiscal 2024],” she adds. “It will also be a beneficiary from global manufacturing shifting away from China.”
The country is heading into a multiyear upcycle with healthy corporate cash flows, and manufacturing is a clear theme, she says.
Mr. Modi’s “Make in India” campaign prioritizes domestic manufacturing over imported products and services so that more orders are going to domestic companies, she adds.
Ms. Chi is also heartened by the continued deficit reduction in the budget and other proposals.
“The government pegged the fiscal deficit at 4.9 per cent of gross domestic product – a five-year low,” she says. “It will also continue its capital-expenditure momentum and focus on job creation.”
AGF Emerging Markets Fund is slightly underweight in India with an 18-per-cent exposure to its stocks. She favours industrial names, such as Larsen & Toubro and farm machinery maker Escorts Kubota Ltd. KUBTY.
The fund is also overweight in consumer staples stocks. They include PepsiCo Inc.’s Indian bottler, Varun Beverages Ltd., which has gained market share in regions where Coca-Cola Co., has been strong.
Ms. Chi likes telecommunications names such as Bharti Airtel Ltd., and also owns Infosys, which recently reported a strong first quarter amid “a nice recovery in its growth.”
Tyler Mordy, chief executive officer and chief investment officer at Kelowna, B.C.-based Forstrong Global Asset Management Inc., sees India as the “poster child” for the next emerging markets boom that extends far beyond China.
“India is a very classic emerging markets story,” says Mr. Mordy, whose team oversees the actively managed Forstrong Emerging Markets Equity ETF FEME-T.
The country’s population is moving up the income scale while infrastructure spending will increase productivity and ultimately lead to corporate profitability, he says.
Mr. Mordy doesn’t see India’s new coalition government having a negative impact on the economy. “Mr. Modi’s pro-market reforms have already helped unleash India’s growth potential.”
The most significant aspect of the budget is the continued investment in infrastructure, with capital investment maintained at a record US$133-billion, he says.
Indian stocks also have a dual tailwind of a growing domestic investor base, whereby its citizens are increasing savings and foreign investors are looking to diversify from China, he adds.
Although the increased capital gains tax on equities appears to have dampened some sentiment toward the Indian market, “the budget is largely positive,” Mr. Mordy says. “It has a long-term focus on boosting employment and capital expenditure.”
The key concern is Indian equities are trading at close to record-high multiples and are far more expensive than their emerging market peers, he says. “Indian equities are basically priced for perfection with little room for negative surprises.”
That’s why the Forstrong ETF is underweight in India, with about a 12-per-cent exposure. Its India play stems from Franklin FTSE India ETF FLIN-A and indirectly through WisdomTree Emerging Markets High Dividend Fund DEM-A.
However, because of India’s attractive long-term macroeconomic outlook, Mr. Mordy notes that Forstrong “plans to increase exposure if the Indian market experiences a meaningful correction.”
Indian stocks have traded at a premium for a long time, he says. “We think they will continue to trade at a premium over their emerging market peers simply because that long-term story is so good.”
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