While the developed world is trying to come to terms with slowing economic growth and the credit crunch, emerging markets continue to drive forward, making it an ideal time for many long term investors to seriously consider investing in this asset class.
I recently looked at Russia and the opportunities offered there. Today, I look at another BRIC (Brazil, Russia, India and China) nation - India.
The transformation of India in recent years has been nothing short of staggering. Economic reforms undertaken since 1991, combined with India’s large, highly-skilled, but low cost workforce and improving government levels have led to a strong revival in economic growth and rapid increase in employment and reduction in poverty.
India has developed high and sustainable levels of economic growth. The economy enjoyed GDP growth of nine per cent in the financial year ending 2006 and 9.4 per cent in 2007, according to www.economywatch.com.
Citigroup estimates that growth is forecast to stay at value levels during 2008 and 2009 of 9.3 per cent and 9.4 per cent respectively.
These growth rates are significantly ahead of mature economies such as the United States where GDP growth is forecast to remain below four per cent during the next two years and both Japan and the European Union where growth is forecast around or below two per cent in 2008 and 2009. Indeed, India’s growth rate is only surpassed by that of China, where forecasts for GDP growth are at slightly higher levels of around ten per cent.
Whilst India’s emergence on to the global economic stage is not a new story, its real growth phase could only just be beginning, with a range of factors supporting its economic performance. Let’s look at the main areas.
India has one the highest proportions of economically active citizens in the world. Its inhabitants make up 17 per cent of the global population, compared with seven per cent for the EU and five per cent for the US.
Only China has more citizens - its populace makes up 20 per cent of the global total.
India, however, is expected to take over China, which is maintaining its one child per family policy to limit population growth, within a generation.
The country also has a distinct advantage relative to other emerging markets - the age profile of its citizens. India is one of the youngest countries in the world with some 60 per cent of its 1.3 billion population below 30 years of age. In 2020, the average Indian will be only 29 years old, compared with 37 in China, 45 in western Europe and 48 in Japan, providing the country with an active workforce.
India also has a rapidly rising rate of education with greater numbers of families making their children’s future and education a priority, and an increasing aspiration for children to gain university degrees. Some 50 per cent of secondary schools provide an English language education.
A young, highly skilled and increasingly English-speaking population should have a considerable impact on economic growth, which should in turn, lead to rising employment and the emergence of growing middle class.
According to a 2007 survey by CLSA, a leading Asian-Pacific equity group, half of middle class households surveyed saw their income rise in the previous 12 months, of which one third saw their salaries rise more than 20 per cent. Furthermore, 63 per cent of respondents expected their income to increase in the next 12 months. The development of world-class infrastructure is central to India’s emergence as a global economic powerhouse. Traditionally it has been weak, but it is changing fast. In the past few years India’s cities have undergone significant infrastructure upgrades and these benefits are now being pushed out to rural areas.
India needs to spend an estimated US$475 billion between now and 2012 on roads, railways, ports, electricity transmission limes and other infrastructure.
As the costs cannot be covered by public financing alone but the $39 billion Bharat Nirman programme, a government initiative, has been working to connect villages and provide housing, clean drinking water, electricity an telephone services across rural India.
In the two years since it has started, 39,476 km of roads have been developed, 2.6 million hectares of agricultural land have had irrigation improved and 48,704 villages have been connected to telephone services (source: www.thehindu.com). But how does all this affect their stock market? A Bloomberg survey of January 2008 ranked the Indian market as the eighth largest in the world.
It goes on to state that there are some 7,000 companies listed on the Indian Stock exchanges with over 225 companies having a market capitalistation over US$1 billion.
The total stock market capitalisation stood at some $1.81 trillion at the end of 2007, compared with $1.40 trillion for Brazil, $ 0.99 trillion for Russia and $4.46 trillion for China.
India’s stock market is broadly split with only one sector currently making up more than 15 per cent of the market. It is also a very liquid market. It is attracting significant local and foreign institutional flows.
Domestic life assurance companies are amongst the biggest domestic investors at present and are estimated to be investing between $12 billion and $15 billion a year.
The domestic mutual fund industry is also growing at a rapid pace. As there are currently only a small proportion of individuals invested in financial assets, the rise of middle income households should result in a growing interest in equity investing.
Corporate earnings have grown at a rate of 28 per cent over the last four years and are currently expected to grow at over 20 per cent in 2008 and 2009 (source Edelweiss, January 2008). India may well pause for breath after recent fantastic returns. But investing in India, as with any (especially emerging) market, is about seizing the long-term potential. Investors should be under no illusion about the role of India will play on the world stage in years to come.
* Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers at Barston near Solihull. E-mail: TILaw@montpeliergroup.com