Reading time: 4 minutes
Due to its relatively strong economy, India’s share market has not only been one of the best performing among emerging markets in recent years, but also the world. As this note will demonstrate, India continues to offer both an alluring growth opportunity and useful source of added diversification for Australian investment portfolios.
India’s Strong Economic Growth Potential
Next to China, India has been one of the star economic growth performers in recent years. Over the last decade to 2018, the economy has enjoyed average annual growth of 7.5% p.a., only just below China’s growth rate of 7.9% p.a., but well ahead of global growth of only 3.4% p.a.
As seen in the chart below, moreover, recent IMF forecasts suggest the Indian economy should continue to enjoy relatively strong economic growth in coming years.
There are several factors supportive of this continued strong growth outlook for India.
- Demographics: India’s population is relatively young and growing strongly. According to United Nations estimates, India’s population will have a median age of only 28 years next year, compared to 42 years globally and 38 years in China. UN forecasts suggest India’s population will grow at an annual rate of 0.9% over the decade to 2030, compared to only 0.2% in China.
- Catch-Up Development: India also retains tremendous catch-up growth potential. Indian-per-capita GDP in 2019 was estimated at $US7,874, or less than half that China’s $US18,110, and well below the $US65,606 average of the United States.
- Urbanisation: The productivity enhancing movement of rural workers into urban services and manufacturing employment – which is typical in successful developing economies – has much further to go in India than China. According to UN estimates, only 34% of India’s population lived in urban centres as at 2018, compared with 60% in China and 55% across the world.
Last, but not least, India’s political environment is currently both stable and reformist. Under the second term leadership of Prime Minister Narendra Modi, India is embarking on significant reform, including major productivity-enhancing infrastructure projects, such as doubling the length of national highways, 100% electrification of all households, and significantly increasing the number of airports across the country.
Strong Historical Share Market Performance
As might be expected given India’s strong growth potential, the share market has performed relatively well in recent years.
As seen in the chart below, the index of quality companies that the BetaShares India Quality ETF (ASX Code: IIND) aims to track has significantly outperformed both global and other emerging market equities in the decade since the financial crisis.
What’s more, Indian equity returns have tended to have relatively low correlation with Australian equities and global equities more broadly – meaning they offer an important potential source of portfolio diversification.
As seen in the table below, since mid-2008, the correlation in monthly returns between the S&P/ASX 200 Index and IIND’s Index in $A terms has been only 0.33, or around half the correlation Australian equities have had with global equities overall. In turn, that reflects the relatively low correlation between Indian and global equities of 0.42.
Which Index? Why quality pays in India
India has one of the most concentrated stock markets in the world, meaning that under a traditional market-cap indexing approach, there is potential for a small number of large-cap companies to dominate returns.
To mitigate against such stock specific risk – and to provide exposure to potentially more dynamic companies with strong fundamentals – IIND’s index methodology results in a portfolio of the top 30 companies – equally weighted between large and mid-cap companies – with the highest “quality” characteristics, based on metrics such as return on equity, earnings stability and debt exposure.
As seen in the chart below, IIND’s Index has not only historically outperformed global markets, but also other widely followed Indian equity benchmarks, namely, the MSCI India Index and the Nifty-50 Index – that adopt a traditional market-cap weighting approach.
As should be evident, the BetaShares India Quality ETF (ASX Code: IIND) provides exposure to one of the fastest growing economies in the world, with future growth potential underpinned by strong demographic, economic and political fundamentals.