India is known for its vibrant economy, diverse sectors and robust growth potential. The country recently surpassed China as the most populous in the world, making it an attractive destination for investors looking to capitalize on its dynamic market. In recent years, India has witnessed a transformative wave of economic reforms, coupled with a thriving entrepreneurial spirit, paving the way for interesting investment prospects.
Indian equities offer a wide range of sectors that present compelling opportunities for investors seeking long term growth from technology and consumer goods to health care and housing. Josh Rubin is portfolio manager at Thornburg Investment Management and recently visited the country.
The Modi-led government, which actually faces General election here in just a few months, has done a lot to try and bolster the Indian economy over the past several years. What is there still left to do and what are some of your general thoughts around the upcoming election?
The spring elections are very important for both capital markets and corporate confidence. For the next five years, we would be entering Modi’s third term. His first term was about learning how to govern. That coalition had never governed before. The second term was more about solidifying the policies they’ve been putting in place.
I think the third term would be about finalizing the muscle memory of the whole economy for how to operate going forward. What we’ve seen over time are improvements that reduce friction for interstate commerce, and that’s really important in a country as big as India, along with tax collection, which reduces the informal economy, the gray market economy, and strengthens the formal economy along with land use policies that make development easier.
During these two terms, corporates and individuals were really learning how to adapt their lives to the new policies. Stability in the third term can really make all of those a permanent part of the Indian economic structure.
Although India has plenty of attractive opportunities, it also has a great disparity between the wealthier urban cities and the poor rural areas. How do you think about the contrast between those two groups and how does it factor into your investment thinking?
Demographics are definitely an important starting point for any Indian equity investor. But we believe it’s important to think about the construct today compared to what it will look like in the future. Today, the population looks like the base of a pyramid at its lowest end. The greatest part of the population is at poverty level, earning enough to eat, but not to do much more for the next decade.
We think that pyramid will turn and look much more like a diamond, meaning the middle-income levels should be about 50% of the population a decade from now rather than 25% today. The other part of it is we certainly know population growth, but it’s not just the absolute number of people in the country. A lot of it has to do with household growth.
Historically, India has been a country of multigenerational households where the grandparents, the parents and the kids live together. The household might be eight or ten people. With rising incomes, we have begun to see just single-family units living together. As result certain aspects of consumption are growing much faster than the population, both because of income growth and because of the increasing number of households as households get smaller.
What are some areas of the Indian economy that really stand out right now?
The good news is the top-down picture for investing in India is very attractive and the breadth of offer opportunities is very high across all sectors. There are interesting themes and great companies to invest in. The bad news is valuations are also very high in India today. Therefore, discipline and caution are important when thinking about the entry point for stocks, since both on an absolute basis and relative to the rest of emerging markets valuations are elevated.
We are finding opportunities in areas that pivot around a popular theme. For instance, people generally think of the consumer as being discretionary consumption in stores, retail and so forth. But housing in India certainly is a consumer product that has been underinvested in for the last decade. What’s really interesting is that across the rest of the world, we’ve seen rising home prices and now peak interest rates, making housing affordability at an all-time low across the world. But in India, even after a decade of underinvestment, house prices have basically been stable while incomes have been growing. Affordability is at all-time highs in India today.
Indian Consumers are ready to buy a new home, especially after Covid. It’s a catalyst for people to move out of a ten-person household into just a single-family household. Some home builder companies believe they have the opportunity for 15 to 20% growth over the next decade at multiples that are in line with or sometimes even cheaper than other consumer discretionary companies.
Another area of underinvestment but with a long runway for growth is health care. India has been a great training ground for doctors and other healthcare professionals for the rest of the world for the last 20 to 30 years. But today, with rising incomes, there’s a chance for those professionals to stay in country and provide health care to the general Indian population. Looking at a variety of metrics, primary care and insurance coverage are generally low, so we think there are very attractive opportunities for investing in the healthcare space in India today.
The third area we think still has growth potential the financial sector. There are three parts to it. One is for India’s growth; corporates still need to borrow to invest in additional capacity for anything they’re providing. The second area is wealthier and middle income households that are growing more sophisticated in the needs they have for financial products. And finally, that bottom of the pyramid we discussed needs products and financial inclusion as it moves into the middle of the diamond.
Important Information
The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This document is for informational purposes only and does not constitute a recommendation or investment advice and is not intended to predict the performance of any investment or market. It should not be construed as advice as to the investing in or the buying or selling of securities, or as an activity in furtherance of a trade in securities.
This is not a solicitation or offer for any product or service or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by Thornburg or its affiliates. Nor is it a complete analysis of every material fact concerning any market, industry, or investment. Data has been obtained from sources considered reliable, but Thornburg makes no representations as to the completeness or accuracy of such information and has no obligation to provide updates or changes. Thornburg does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein. The views expressed herein may change at any time after the date of this publication. There is no guarantee that any projection, forecast or opinion in this material will be realized.
Investments carry risks, including possible loss of principal.
