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India now represents approximately 17% of the global population (behind only China) and ranks 6th in global GDP, with thriving manufacturing, technology, and service sectors1.
The IMF recently projected that the Indian economy will grow 12.5% in 2021, ahead of China, the only country to show positive output in 2020, a year heavily hindered by the global Covid-19 pandemic2.
Investors looking for exposure to the growth opportunities India offers can consider the India Quality ETF (IIND).
The Indian growth opportunity
India is projected to overtake China as the world’s most populous country, and become the world’s third largest economy by 2035 after China and the United States, measured by market exchange rates. It is already the third largest economy measured by purchasing power parity3.
The long-term growth potential of the Indian sharemarket is underpinned by India’s favourable demographics – a large, growing, young population – and an open and democratic political system.
2021, however, is proving to be all about India attracting strong foreign investment flows. India ranks top in flows to emerging market countries, attracting ~$5bn into its sharemarket this year to end of February 20214. This has been driven by three main themes:
- Reform and fiscal policy
Infrastructure: the Indian government has committed to ~A$1.8 trillion investment in infrastructure by 20255. To this end, the central government has put in place a reprieve to grant 100% tax exemptions for sovereign wealth funds for their investments into the infrastructure sector, which is anticipated to boost investments and growth in the economy6. In the short term, this will support employment, with the longer-term benefits of useful infrastructure to improve urbanisation and lifestyle for the younger demographic population, which makes up the majority of the workforce7.
Reform and fiscal policy: historically, India has been complicated for foreign business operations. However, the government has initiated regulatory reforms to help open the county to foreign business investment as well as assist domestic businesses. These reforms should benefit both foreign and local companies for greater cross-border activity and growth. For example, the aforementioned tax grant to support infrastructure is already paying dividends.
Consumption: a key engine to any economy is the growth of its middle class. The percentage of households in poverty in India is projected to drop from 15% to 5% by 2030.
According to Australia’s Department of Foreign Affairs and Trade, by 2025 one-fifth of the world’s working age population will be Indian. By 2030 there will be over 850 million internet users in India. By 2035 India’s five largest cities will have economies of comparable size to middle income countries today8.
This is likely to have flow-on benefits to manufacturers of higher quality consumer staples9.
The Indian sharemarket
This year alone to end February 2021, global investors had poured over A$5 billion into the Indian sharemarket, driving market capitalisation to A$3.5 trillion, which for context supersedes the Canadian and German sharemarkets10.
The Indian sharemarket has performed strongly over the last 1, 3, 5 and 10 years ending 31 March 2021, in particular when you look at the Solactive India Quality Select Index over the traditional market capitalisation indices within Emerging Markets. The Solactive India Quality Select Index has outperformed the MSCI India Index over 3, 5 and 10 years (though not over 12 months), and with lower volatility.
|1 year||3 years||5 years||10 years|
|Solactive India Quality Select Index||33.80%||20.09%||10.90%||20.77%||13.47%||18.45%||12.16%||18.53%|
|MSCI India Index||41.17%||27.55%||9.08%||22.19%||11.37%||19.72%||7.73%||20.48%|
|MSCI China Index||15.19%||21.47%||8.86%||20.43%||16.38%||18.79%||10.69%||20.54%|
|MSCI Emerging Markets Index||27.23%||14.64%||7.05%||16.12%||12.60%||14.55%||7.19%||14.50%|
Source: Bloomberg. As at 31 March 2021. Past performance is not indication of future returns. You cannot invest directly in an index.
How can Australian investors get exposure to India?
India still faces challenges, with current Covid-19 cases now surpassing both the U.S. and Brazil11. However, with the promise of a strong vaccine rollout, and the factors outlined above, the economy’s long-term prospects appear attractive.
Australian investors looking for exposure to long-term growth opportunities in India can consider the India Quality ETF (IIND). IIND provides exposure to a diversified portfolio of the 30 highest quality Indian companies based on a combined ranking of the following key factors: high profitability, low leverage and high earnings stability.
IIND’s methodology equally weights exposure to large and mid-cap Indian companies, which allows exposure to some potentially more dynamic companies with stronger fundamentals than large caps alone.
By explicitly allocating to both large and mid-cap Indian stocks, we believe IIND provides an investment exposure more representative of the broad Indian economy than a market-cap weighted exposure.
There are risks associated with an investment in IIND, including market risk, emerging market risk, currency risk and index tracking risk. For more information on risks and other features of IIND, please see the Product Disclosure Statement, available at www.betashares.com.au.
3. Department of Foreign Affairs and Trade, An India Economic Strategy To 2035
8. Department of Foreign Affairs and Trade, An India Economic Strategy To 2035