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How to invest in India, the world's fastest-growing major economy

June 17, 2024
Economy
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India has been dubbed the “perfect” emerging market to invest in, but it can be tricky for those outside the country to gain access. CNBC Pro assesses the case for buying into this booming economy, the risks to consider and how global investors can get involved. India’s stock market has been making headlines this year and for good reason. India’s stock market is now the fourth-largest in the world, as measured by the total value of listed companies, and benchmark indexes have hit successive record highs this year. Its Nifty 50 and BSE Sensex indexes are both more than 20% higher over the last 12 months.

The country’s economy is also on the up. It’s expected to grow 7.6% in the 2024 financial year and it is “easily” the fastest-growing economy in the world. India even managed to shrug off political concerns around this year’s huge general election, with stocks soon recovering losses despite the failure of Prime Minister Narendra Modi’s ruling Bharatiya Janata Party to secure an absolute majority in the lower house of Parliament. India’s economy is growing fast (its GDP exceeded analysts’ estimates in the January-March quarter) and access to the internet is rising rapidly – India is the fastest-growing premium smartphone market in the world. Added to this, it has a vast number of young inhabitants: more than 40% of its population is under the age of 25. Meanwhile, a jump in consumer spending, with 100 million people in the country expected to become affluent by 2027, up from 60 million currently.

There’s a real estate boom, improving consumer confidence, particularly in urban areas, and a robust infrastructure capex cycle, including early signs of a private capex revival. This can potentially sustain both economic momentum and corporate earnings growth. There are a variety of ways to get into the market and plenty of potential opportunities — with a few caveats. When it comes to individual investors, foreign-based non-Indians aren’t allowed to directly buy stocks via online trading platforms, but can access the market via mutual funds and exchange-traded funds (ETFs). There are also ADRs and GDRs — American and Global Depositary Receipts — which allow overseas citizens to gain access to foreign stocks via their own countries’ stock exchanges. One of the big issues about investing in India for overseas investors is the lack of good representation in terms of ADRs or GDRs. This is quite different to China, for example, where big tech companies, such as Tencent, have ADRs. Indian stocks make up 21% of Causeway’s emerging markets fund, the largest weighting after China, which has 27.4%.

When it comes to ETFs, there are many options for international investors to track India’s indexes. Some of the top ETFs in North America include the Columbia India Consumer ETF, the First Trust India NIFTY 50 Equal Weight ETF and the BMO MSCI India ESG Leaders Index ETF. India is a stock picker’s market with many listed companies, including some great small and mid-cap names that are not included in the MSCI India or other mainstream indices like Nifty. Another way to get exposure to the country is via Indian stocks traded in the U.S. or U.K., such as travel company MakeMyTrip, which trades on the Nasdaq. Investors could also buy stocks in U.S. or European-listed companies that make significant revenue in India.

India has major ambitions in manufacturing, infrastructure and technology, and analysts from Bank of America described the country as being “at the center of AI” in a May research note. India is likely at that point where China was 6-7 years ago in terms of an inflection point in discretionary income leading to consistent spend towards lifestyle upgrades. One expects strong year-over-year growth in sectors including energy, autos, utilities and pharmaceuticals, and suggested performance in banks, industrials and staples would be “subdued.” The bank’s March 2025 target price for the Nifty index gives it 7% upside.

The “premium consumption” is growing in autos, food and personal care — and financial inclusion (the country has a big focus on improving digital access). The exposure is spread across well capitalized private sector banks and non-bank financial companies as well as good quality insurers. EMQQ Global’s Carter is very positive on internet stocks, given the Government’s investment in the so-called India Stack, the country’s “digital public infrastructure” based on its identity program, that enables instant money transfers and myriad other functions. His firm’s Internet & Ecommerce ETF includes holdings in tech holding company Info Edge and Reliance Industries, a sprawling conglomerate that operates in sectors ranging from oil production to digital services. Modi’s continued push ahead with reforms — as well as currency fluctuations and stock valuations are all worth considering when investing in India. The currency has been remarkably resilient this year. In the face of the U.S. having high interest rates, one would have thought that India would have done worse this year, but it’s actually held in pretty well. For the year to the end of March, the rupee fell 1.5% against the U.S. dollar, although this was markedly less than 2023′s 8% slide. It has weakened only slightly since, although traders say the Reserve Bank of India has been intervening in the market to defend the rupee.

Modi’s lack of supermajority could mean higher fiscal deficits if he comes under pressure to spend from his coalition partners. And if markets wobble, the rupee could come under pressure. If that’s the case, then there’s pressure put on the central bank to lower rates in order to help growth, and that can put additional pressure on the currency. When it comes to valuations, it is said they’re looking stretched and described India as “relatively more expensive”. While India’s growth potential is the fundamental reason why investors are willing to pay a premium in this market, nonetheless, judgement is required in terms of how much an investor is willing to pay for that growth. Some market makers see Indian stocks as overvalued, with the fund manager describing prices as “far too high.” There will be some problems along the way, there will be an Indian bubble at some point. But right now, it’s an unmatched opportunity and it can’t happen again.

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