India: The next investment shift

If ‘Alpha’ is what the investment world is after, then India is a bountiful prize with troves of untapped potential, wealth of partnership opportunities, multitude of ambitious talent, heartful of warmth, and exuberance of enthusiasm. Anyone believing in 'Active management' cannot and should not discount the Indian opportunity to unravel hidden champions of positive performance. It is not about what has happened in the past, it is about what it promises!

Case-in-point is the year 2021. With significant growth in public markets (competing for the 5th global spot), increasing capital injection in the startup world, and momentum to push for reforms+privatization, India has been a compelling story. (see stock market graph from Bloomberg News)

Collectively there is a lot to say about one of the biggest capital markets in the world. The ambitions to propel the economy are intact. ‘India will become a USD 5 trillion economy by 2024-25 and a USD 10 trillion by 2030’ is a vision and statement which could position India as a manufacturing engine and a bankable investment target. This renewed optimism stems from multiple channels like growth in exports in 2021 (driven by momentum in advanced economies), India’s likelihood to capture one of the top spots in the list of the world’s fastest-growing major economies (fiscal year ending March 2022), continued strong growth in demand for bank credit pointing to unceasing consumption trend, and many more such snippets.

In this short strategic piece, I cover three areas of opportunity (startup sector, public markets, and infrastructure) whilst also touching upon some critical topics for investors.

A thriving startup world?

India’s long-term consumption potential (be it consumer-focused or tech-driven) has had a deep influence on recent startups. Consumer sectors, like vertical e-commerce, edtech, fintech, and foodtech, have attracted huge investments driven by the massive Indian middle-class market and its scalability. (See quote below from HURUN INDIA and BusinessLine)

The importance of the middle-class in the Indian context is massive. India will harbour one of the biggest jump in the growth of the middle-class population by 2030. Meanwhile, the purchasing power of the middle-class is already solid and set to further strengthen the consumption story (see side graph from J.P. Morgan).

Millennials will also play an increasingly important role in the consumption story as they have the power to shift buying behavior patterns in the next 5-10 years (especially when viewed in the context of online sales). The strength of their numbers is undeniable. With more than 800+ million millennials, Asia has more than ten times that in the U.S. and so many among them are becoming part of the middle-class earning category fueling the consumption story.

Meanwhile, the healthcare sector, guided by gigantic global tailwinds, is poised to make big news in the Indian consumer market in the coming years. I do not want to separate Indian startup success story from the global context. Venture Capital and Private Equity investments, in general, have taken a big leap forward in recent years. However, for India, it has had a much stronger impact and will continue to do so. The cyclic effect of quality founders with successful startups plowing back their efforts into the ecosystem is what is creating a multiplying effect on India’s startup success story.

Within these factual changes, there is also a subtle notion to reconfigure India's tech startup narrative. India has led the growth of the IT-outsourcing and IT-services domain for many years and it is now a well-established industry. Millions of professionals have benefitted from the growing hunger for corporate digitization. So much so, that the first thing an Indian face is associated with is IT! This strength has become a stable foundation upon which the tech industry is pushing India into a different domain. Now the tech/IT is building for India first, churning out unicorns and en route, winning the world. The Indian-SaaS subcategory has been a standout in this regard. (Check quotes below from Bain & Company)

All these positives have become a sustainable loop where strong digitalization growth, robust consumption-driven economy, and the strength of tech startups are going to continuously push forward the startup sector for decades.

Public markets

March 2020 was a global shock for risk assets when equity markets took a nosedive. So was the case for India. However, the resurgence of the Indian story captured everyone’s attention in 2021 (see graph below). From a March 2020 low, India’s Sensex has risen greater than 100% until December 2021. This growth is the highest among countries with stock markets worth USD 1 trillion or more. (See graph from Bloomberg News)

When talking about emerging market equities investment, India is amongst the top picks for many analysts. In 2021, Indian markets delivered far better than emerging market benchmarks (see graph below from Times of India). As the whole equity world seems to be rich, it seems so for Indian equity market on a relative basis. For any short-term player, it might be a cautionary point; whereas for long-term players (which is where the better alpha play exists), the Indian story points to selecting securities with a solid background, supported with a scalable component, and backed by India specific tailwinds.

India’s strong public market performance and investor sentiment made the Initial Public Offerings (IPO) an attractive choice for equities investors. Many stellar listings (e.g. Zomato, Nykaa, and others) in 2021 have delivered significant gains and the expectation is more will come in near future as more private companies backed by VCs mature (especially the consumer technology sector companies) and seek an attractive exit option.

This potential for capital gains has not gone unnoticed and has attracted retail investors who are plowing capital in the equity markets. This global trend is also mirrored in India as first-time investors are taking a risk/chance and using tech apps to shape their financial future. Participation of Indian households in the equities market remains low at around 7% versus an average of 30% for other major emerging markets. This underlines a large appetite for capital injection in stock markets. In early 2020, India was adding 400,000 investor accounts every month, according to its market regulator. Retail investors put 860 billion rupees into India’s National Stock Exchange’s cash market this year, compared with 512 billion rupees in 2020 (check source list point 9). Though investor diversification and increasing participation depth are a good development, caution is a given when small investors face a market downturn.

Infrastructure?

One key piece to make a picture-perfect investment outlook for India is Infrastructure. Infrastructure has a "multiplier effect" on economic growth across sectors. Be it roads, renewables, logistics, ports, etc, there is a huge need for public, private, and foreign investments.?

If we look in relation to the global supply chain changes currently ushering in the world, India has a window of opportunity to emerge as a global manufacturing hub. A sprawling manufacturing sector can absorb the unemployed, cover the increasing domestic demand, and lead to innovation in multiple business areas. However, the key to delivering this change is infrastructure. For a manufacturing prowess to be built, India needs a reliable, well-connected, fast, and yet cost-effective network of roads, railways, and airways. There have been positives recently, for example, the Bharatmala road development plan has increased the pace of road construction considerably. The way forward has to be a more holistic approach (including also non-road-based initiatives) with a strong execution focus (fast-forwarding delayed projects) driven by streamlined processes (reduction in gaps).

Relative to existing capacity, renewable power's growth in India is among the fastest in the world as compared with other key markets (new installations set to double over the forecast period compared with 2015-20). (check quote from The Economic Times)

However, with infrastructure, there is always a need to balance the political angle and the perception issue. The recent COP26 showed what role global politics and media can play in any economic growth narrative. Social platforms were filled with finger-pointing quotes pulling India at the center of the debates. Even supposedly informed experts who are working directly/indirectly in the sustainability field, calling COP26 a sort of whitewash and blaming it on India. This is exactly what should not be happening. To all these people, I refer to a common saying ‘One hand cannot clap alone.’ Reading more extensively would make everyone realize the role other countries played into the outcome. Such blame-games are a major distraction for investors, dampening the momentum needed for a holistic development.??

The elephant in the room

Now, let’s tackle the elephant in the room. For some foreign players, Indian investments have been a mixed bag or a bitter-sweet experience in the past; and their emotions+experiences are causing apprehensions even when the rational process would lead to a 'buy signal.'

To be clear, in the current market environment, as an investor - ‘Grass is not green on any side.’ There are challenges in every asset class dimension though it has taken different 'Avatars.' In developed private markets it is about chasing good deals and fighting against limitless capital availability, in equity markets talk is about peak valuation and caution signs, in debt space it is about the fear of interest hikes and inflation. Small investors talk about deal access while big investors talk about the ‘everything is expensive’ world.?

An investor’s ability to understand and accept specific risk factors is what soothes their apprehensions and churns out investment decisions. In India’s case, this acceptance may sometimes meander into subjective domain and image perception issues which are rooted in a limited understanding of India as a country. Once on a call with an investor (who had just returned from Mumbai), I asked about his assessment. His first comment was not about the investment opportunity at all, but rather his astonishment at seeing rich and poor co-exist next to each other. Diversity and plurality are strengths of the Indian system. Merely evaluating investment topics with emotions without understanding the cultural history, will not lead to better decisions.

All said, India’s story will be impacted by the common global drivers, like - inflation expectations, rising rate fears, liquidity tightening, or 'more of the same' in terms of Covid (and newer variants), which pose challenges to global economic recovery. India is not detached from these factors and will be impacted proportionally. However, India-specific factors could weigh in higher. Topics like a continuous push towards effective policy reforms must be the underlying topic in every investment discussion. A large pool of youth can be called a positive driving force; however, unemployment can also quickly become a societal pain if not tackled well. Additionally, effective infrastructure spending, modernization of the agricultural sector, and enhancing the supply chain backbone are a must if India wants to deliver on its promise of becoming a USD 5 trillion opportunity by 2025.

A shift is happening in India's long-term investment potential. Are you ready?

Disclaimer: All views are personal. This is an informational piece and not investment advice. Check the source list below.

1. https://www.bloomberg.com/news/articles/2021-10-11/roaring-india-stock-market-on-track-to-overtake-u-k-s-in-value
2. https://www.thehindubusinessline.com/news/with-54-unicorns-india-overtakes-uk-to-third-spot-hurun-index/article64816938.ece
3. https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf
4. https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/2022-outlook/reflation-endgame-amv.pdf
5. https://www.bain.com/insights/india-saas-report-2021/
6. https://www.bloomberg.com/news/articles/2021-12-31/india-stocks-post-biggest-gains-since-2017-on-recovery-hopes
7. https://timesofindia.indiatimes.com/business/india-business/decoded-in-charts-will-2022-be-a-year-of-consolidation-for-indian-equity-markets/articleshow/88705371.cms
8. https://economictimes.indiatimes.com/industry/renewables/indias-renewable-growth-rate-accelerating-faster-international-energy-agency/articleshow/88033781.cms
9. https://www.livemint.com/market/stock-market-news/how-mobile-phone-is-helping-zerodha-in-robinhood-markets-nitin-kamath-explains-11639957942272.html