Asset Class: Emerging Markets Equities

India: A positive outlook

Main Bazar, Paharganj, New Delhi, India

Our long-term outlook for India remains unchanged. It is the largest democracy in the world and is among the fastest growing economies of its size bracket, with huge potential to expand further.

The per capita GDP for the country is below $2,000, which compares to about $50,000 for developed nations. The demographic dividend will continue to be favorable for India as its median age is still below 30. If this young population is gainfully employed and made productive it has the potential to not only emerge as a large market globally but also to lift a large part of humanity out of poverty over the coming decades.

Under-reported positives

While these factors are well known and widely discussed, there are also several other underappreciated aspects of India, which gather fewer headlines. These include an independent and functional albeit slow judiciary, a strong autonomous central bank, an independent election commission that ensures fair elections, smooth transition of power, freedom of speech and one the largest armies in the world that reports to the executive government. Yet often the lack of infrastructure, incidence of religious clashes, poverty, and women’s safety (which are of course major areas in need of improvement) tend to dominate the discourse about India. We feel a more balanced perspective is needed.

Politics – an important theme

In 2019 all eyes will be on politics, as India will conduct its central elections where PM Modi will seek a fresh mandate., It is pertinent to note a couple of facts about the elections:

  • The election for the lower house of the parliament covers 543 seats, for which over 850 million voters will cast their votes electronically. In the 2014 elections, the electorate was 550 million strong.
  • Modi’s BJP swept to victory in most states following the general elections in 2014. However, the recent state results have shown that anti-incumbency is a strong factor to overcome as Modi’s party lost three state elections where it was the incumbent for many years.

It is important to be aware of the political wrangling, but it is hazardous to predict election outcomes.

Central bank policy – one to watch

The governor of the central bank (Reserve Bank of India) recently quit following clashes of opinion over the monetary policy and the use of bank’s reserves. The government quickly appointed a replacement; however, we note that interference with the central bank policy by governments rarely sees favorable outcomes. These changes are evolutionary in nature and have longer rather than shorter-term implications. This is something to watch closely.

Summary

We are cognizant of the risks to the fortunes of India’s economy, which include trade wars, regional conflicts with neighboring states, higher commodity prices and job creation. However, on balance our outlook for India remains positive. It is the sixth largest economy with GDP of $2.5 trillion, it is the second largest nation by population, and is one of the world’s youngest nations. India also boasts over 5,000 listed companies out of the 23,000 listed companies in the emerging markets, so it continues to be a great hunting ground for quality companies with excellent fundamentals to continue to compound cash flows.

 

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