By Muskan Arora
The ‘youth-driven’ India with a focus on
technology and manufacturing continues to attract investors, as they move away
from China.
As per a recent report, India’s equity
market is outperforming the S&P 500 index over a one-year, two-year and
three-year time frame, despite the performance of the ‘magnificent seven’
stocks in the US.
Over the past twelve months, India has doubled
the returns of the wider MSCI
emerging market index to 36% against 15%.
“A prudent strategy, for fresh allocations to Indian equities, would be to diversify portfolios across defensive sectors like consumption, pharma, and IT alongside domestic cyclicals,” highlights the mid-year outlook by Barclays.
The geopolitical tensions in China, alongside
relaxed foreign ownership limitations, have paved the way for both private and
public allocations in India.
“To me, what makes India more attractive
relative to China is less state-owned enterprises,” said Mika Malone, managing
principal at Meketa.
During the first quarter of the year, the $472.8bn
Canada Pension Plan Investment Board committed $100m to Kedaara Capital Fund
IV, which focuses on mid-market buyout and minority growth investments in
India.
Further, CPP made credit investments of
approximately $740m to organizations supporting pharmaceutical, manufacturing, solar
and wind power plants, and data and publishing verticals in India.
“I believe there will be opportunities in
several areas including technology, manufacturing and services as well as the
many sectors and sub-sectors that come out of these,” said Shoaib Khan, the CIOof NJ Pension Fund while highlighting growth appetite for institutional
investors.
“You layer on the growth in technology and
the use of technology and then combine that with the need for insurance to
serve the increasing number of cars on the road, increasing home ownership and
meeting the health and life insurance needs of a growing middle class,” added
Khan.
As of May 2024, NJ Pension fund allocates
approximately $200m to emerging markets public equity and will “be surprised if
allocations are not higher.”
When the world was focused on China, the
$98.6bn University of California started investing in India eight years ago and
has witnessed a growth of 42%, as stated by the CIO in a recent press release.
“Chinese equities were slowing down, but
Japanese equities were doing well, and India was showing strong economic growth,”
said the Regents University of California CIO Jagdeep Singh Bachher at March’s investment meeting.
The Massachusetts Pension Reserves
Investment Management Board also noted U.S and emerging market equities to be
the highest performers for its positive returns for the fiscal year.
In conclusion, according to a recent report
by Allianz Trade, a relatively stable government, large internal markets,
successful diversification into manufacturing and services, high annual GDP
growth and low external debt relative to earning make investments in India
favorable for US allocators.
Challenges when investing in India
On June 4, Indian equities posted its
lowest daily performance in four years at -6% owing to the exit polls showing the Bharatiya
Janata Party (BJP), led by Prime Minister Narendra Modi, without an
absolute majority.
In the short term, Indian equities are
vulnerable as small and mid-cap valuations are high, told Kunjal Gala, head of
global emerging markets at Federated Hermes to Morning Star.
“Investors should expect volatility, given
the risk related to government policies and priorities,” added Gala.
“In part, this will depend on the recovery
of the rural and agricultural sector, the government's investment plan, and the
recovery of private sector investment,” she added.
The volatility not only impacts the market
but also influences the value of the Indian rupee in the foreign exchange
markets.
Following the elections, penny stocks of Reliance Power, Vodafone Idea, Yes Bank, Regent Enterprises, Oricon Enterprises and Econo Trade seem to be picking up due to favorable government policies.
“Our economy is one-legged growth, where
only one part of the economy is growing wide on the consumption side, while on
the deposit growth side, we are struggling,” told a leading Indian manager to Market
Group.
According to a recent report by Allianz
Trade, fiscal account deficits, poverty and uneven income distribution, low
literacy rates and the tense relationship between India and China should be
considered by investors when allocating in the region.
Currency depreciation, as triggered by the
election result, can also be influenced by factors including high inflation,
fiscal and monetary policy errors, and an increase in social or political
turmoil, as highlighted by the CIO of NJ Pension Fund.
The Indian investment landscape is in an
early stage, which “also means that markets are still thin and can lack a sufficient
number of institutional investors,” thus indicating a shortage of good
investment talent.
“On the private markets side, the right
opportunity also includes sourcing and investing with the best investment
managers and firms available. To make those investments, a lot of diligence
needs to be conducted and this often involves several trips and meetings,” said
the CIO of NJ Pension Fund.
“For some public pension funds, that can be
challenging at times and for that reason we utilize the input and resources of
our partnerships with manager of managers that have a local presence in Asia,”
he added.
As AI and technology is rapidly growing,
India is strong from a chip designing perspective, and “fabrication from
manufacturing is a testing ground for India.”
Challenges around infrastructure, contract enforcement and labor laws have been noted by key people present in the Indian market.
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