India: Asia's growth engine
Is India on the road to realising its economic potential?
India's economic growth rate has overtaken China's.
Is it finally on the cusp of realising its economic potential?
India’s economy is growing faster than many of its Asian counterparts but many believe that it has failed to live up to its potential - so far.
Now, with favourable demographics and a reforming government, the economic data suggests that India is on its way to fulfilling its promise.
An ever-growing number of quality Asian companies are now competing on the world stage.
Only a narrow selection of Indian firms have emerged as global players in their respective sector but these companies are very successful in their home environment, which so often proves impenetrable to foreign competitors.
Economic growth is partly fuelled by a more affluent, expanding population and a swelling consumer market; combined with the ongoing process of restructuring, India could prove to be one of the most compelling investment stories for the next decade - and beyond.
If this is the Asian century - is this India's decade?
Leading the way on GDP
Asian growth is outshining other parts of the world – and this looks set to continue.
GDP growth in emerging and developing Asia is projected to grow 6.4% in 2017, compared with 1.9% in advanced economies, including the US, eurozone and UK (Source: IMF World Economic Outlook update).
But while for some there has been a fixation on China, as the country shifts from investment-led to consumer-led economy, it is India which is taking the lead.
The country’s GDP per capita (in purchasing power parity terms) nearly doubled between 2007 and 2016 in US dollar terms and the forecasts for GDP growth is that the gap between India and China could grow wider between now and 2021.
The slump which followed the financial crisis in 2008, led to recognition that reforms were sorely needed to get the country back on track.
Growth bottomed out in 2012 and the election of the reformist BJP in 2014 has proved to be a further catalyst for change – leading to key structural reforms. India has also been helped by trade gains and low inflation as a result of a collapse in global commodity prices.
This positive backdrop is reflected by India’s leap in the World Economic Forum’s Global Competitiveness Report, from 55th in 2015/16 to 39th in 2016/17. (Source: The Global Competitiveness Report 2016-2017, World Economic Forum, Switzerland)
A major change to the cash economy – the withdrawal of 86% of banknotes from circulation at the end of 2016 – has led to short-term negative shocks for consumption from cash shortages and payment disruption.
However, this move is still viewed to be a long-term positive for growth.
Moreover, other measures to tame India’s black economy and increase transparency, including making the Aadhar card (a multi-purpose national ID card) mandatory for filing income tax returns, are seen as positive steps for the wider economy.
The middle class: fuelling India's growth
More affluent Asian households
The beating heart of the Asian growth story is the predicted rise in the middle class – creating a new generation of consumers.
Estimations vary, but forecasts are that two-thirds of the global middle class will come from Asia Pacific – that’s more than 2.5 times India’s current population.
In this rapid expansion, it is estimated that a significantly large proportion of new entrants will be from India and China.
Time for India to deliver
This rise in Indian middle-class spenders has been anticipated for some time – going back to the early 1990s and the first days of economic liberalisation – but it has been held back by a slower move towards urbanisation than in countries like China, and the challenges of a diverse population (both in geographical and cultural terms).
Now though, a number of stars have aligned, meaning the hoped-for acceleration could finally be on the way.
While it took some time to get going, steady urbanisation has now seen a major shift in the labour market, from the agricultural sector to manufacturing and services.
India also has a younger, connected and digital-savvy population, with internet penetration growing rapidly.
Taking to the road
Indian vehicle ownership on the move
A growing middle class in India will naturally benefit many companies in consumer-focused sectors, with more discretionary income, this would have a particular impact on vehicle ownership.
The number of registered motor vehicles has risen considerably since 1992, from 23.5 million, to 210 million in 2015.
Four wheels good two wheels better
India’s passenger vehicles market is still dominated by two wheelers, which make up more than 70% of the market. It is in this area where some of India’s quality companies come to the fore. (Source: Indian Ministry of Road Transport and Highways, Transport Year Book 2014-2015, Offices of State Transport Commissioners / UT Administrations).
Hero MotoCorp, for example, has a 39% domestic market share in the two-wheeler market (and 52.4% in motorcycles) selling 6.6 million two-wheelers in the 2015/16 financial year.
It has a sizeable distribution network with 6,000 touch points across India and a presence in more than 100,000 villages. (Source: HeroMotoCorp annual report 2015/16)
Potential for future growth
But there is still a great deal of room for the passenger vehicle sector to grow.
Vehicle ownership is low compared to other emerging markets.
Only 167 per 1,000 people in India own a vehicle. This compares to 386 in nearby Korea - and 783 in the United States.
There is a clear link between vehicle ownership and income – and India’s gross national income (per capita) has almost doubled in just ten years - from US$730 in 2005 to US$1,570 in 2015. This indicates huge market potential as incomes rise.
Two wheels good...
And in India the majority of vehicles owned are of the two-wheeler variety. (Source for preceding statistics: Indian Ministry of Road Transport and Highways, Transport Year Book 2014-2015, Offices of State Transport Commissioners/UTAdministrations).
Maruti Suzuki, is an example of a quality company operating in the small car market which stands to benefit should passenger-vehicle sales go up as expected.
It is the dominant player in this market with a market share of 46.8%. It also benefits from an extensive distribution network of 1,820 sales outlets across 1,471 cities.
In addition, parent Suzuki Motor Corporation will manufacturer and supply cars to the company from its new plant in Gujurat, with an eventual capacity of 1.5 million, depending on market conditions. (Source: Maruti Suzuki annual report 2015/16).
Looking further afield
The rise in vehicle ownership presents other investment opportunities outside the manufacturers, such as companies involved in related infrastructure, like toll-road operators for example.
The number of projects awarded to the National Highway Authority of India has risen since the start of the Modi administration.
We expect an increase in toll revenues, due to new roads and traffic growth on existing roads, both stimulated by a pick-up in economic activity and the cutting of red tape at the state level.
The company’s construction segment is delivering strong growth, while traffic growth is also improving, helped by the introduction of tolls on a new stretch of highway.
The company’s construction backlog is healthy (three project wins in the current fiscal year), while the transfer of mature build-operate-transfer (BOT) assets to an infrastructure investment trust reduces equity-raising risks.
Value to be found
Consensus expectations for measures such as earnings per share (EPS) for equity markets in US dollar terms continue to point towards double-digit growth for 2017.
True, there have been modest downward revisions in Asian markets, but there is a tendency among analysts to begin the year with overly optimistic estimates, which are subsequently revised during the year.
In fact, this revision trend is better than it has been in a number of years. The concern for some investors is no doubt that Indian stocks may appear expensive. On many conventional valuation metrics, such as price-to-earnings and price-to-book relative to its 10-year-history, India is somewhat expensive (in part due to the higher expectations for growth) but not excessively so.
The core of our investment process, however, remains fundamental analysis and, within the portfolio, we have assembled a group of companies with good prospects that we believe are trading at a discount to their intrinsic value.
How can you benefit?
Introducing Martin Currie Asia Unconstrained Trust
We believe that the investment approach of Martin Currie Asia Unconstrained Trust provides an opportunity for investors to benefit from Asia’s extraordinary growth.
Over the long term, we aim to deliver returns in line with, or ahead of, Asian GDP growth.
We adopt a long-term, low-turnover approach, focusing on long-term cash flow potential.
We employ forensic-accounting techniques to gain an in-depth understanding of company fundamentals and place a heavy emphasis on corporate governance.
Our return expectations are realistic, and we believe the strategy’s performance record speaks for itself.
The outcome for our shareholders is a portfolio that has captured Asian growth with lower volatility than the market.
We don’t claim that anything we are trying to do is proprietary in nature. Much of our approach is simply ‘first principles’ investing.
Our competitive advantage is the simplicity and long-term focus of our approach, along with our disciplined and rigorous stock-selection process.
In an industry that can often be regarded as focused on short-term returns, we think that these attributes set us apart.
Find out more
Visit martincurrieasia.com to find out more about the Martin Currie Asia Unconstrained Trust including information on different ways that you can invest.
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Information correct at time of publication. This information is issued and approved by Martin Currie Investment Management Limited. The opinions contained in this article are those of the named manager. They may not necessarily represent the views of other Martin Currie managers, strategies or funds. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
Martin Currie Investment Management Limited, registered in Scotland (no SC066107). Martin Currie Fund Management Limited, registered in Scotland (noSC104896). Registered office: Saltire Court, 20 Castle Terrace, Edinburgh EH12ES. Tel: 0808 100 2125 Fax: 0870 888 3035 www.martincurrie.com. This company is authorised and regulated by the Financial Conduct Authority. Please note that calls to the above number may be recorded.