With growth stagnating in many developed nations, it’s difficult to ignore markets providing substantial returns
As growth stagnates in many developed nations, investors are turning their attention to emerging markets. India, in particular, is a market that is providing substantial returns at the moment. With a current growth rate of 7.4% and with various structural drivers in place to push that higher, the country looks like a good bet for investors tired of muted returns in developed markets.
“From a macro-economic perspective, India is also strong and secure,” says Atul Penkar, Head of Offshore Equities at Birla Sun Life Asset Management. “The fiscal deficit is under control, inflation is moderate and, in recent times, the currency has appreciated steadily against the U.S. dollar and Canadian dollar. All of the structural demand drivers look set to ensure strong growth in India will continue for a long period.”
The strong economic fundamentals have been supplemented by Prime Minister Narendra Modi’s government, which has implemented several pro-growth reforms since Modi’s election in May 2014. The introduction of the GST on July 1st of this year will unify India’s complicated state and centralized tax structures into a common marketplace, which Penkar believes has the potential to drive India’s growth as much as 100 – 150 basis points higher by in the medium to long-term. Another significant recent reform was demonetization, which was introduced in November of last year.
“Along with GST reform, demonetization will help bring the informal economy into the formal economy,” says Penkar, who also manages the Excel New India Leaders Fund. “It will have a significant impact on tax collection and create more revenue for the government to spend on projects in India, which will also help to drive growth.”
According to Morningstar Direct data, Penkar’s New India Leaders fund returned 34.28% in the year between April 2016 and 2017. With over 6,000 companies listed on Indian stock exchanges, there is a lot to pick from, but Penkar concentrates his focus on the mid-cap segment, which, in India, is defined as consisting of companies with market cap of less than $US3.5 billion. “We aim to identify companies in the beginning of their growth cycle, with the potential to grow faster than their peers, by adopting a bottom up approach with fundamental analysis of a company’s management and financials,” Penkar says.
Penkar is excited about India’s growth potential and, with two thirds of the country’s economy being consumption driven, he believes the consumer discretionary sector is well positioned for strong performance in the medium to long-term. “The penetration levels in India {in that sector} are quite low and with the kind of proliferation of demand that we expect see in the next three – five years, we believe the sector will do well,” he says.
Penkar’s fund is also currently overweight industrials and financials, which he expects will perform well as India’s economy continues to strengthen. “The financial sector will do well because of the growth, the reforms and the increased need for credit as people look to buy their first home or car,” Penkar says.
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