Why this CEO believes the smart money’s in India

11 September, 2023

With growth fuelled by middle-class consumption, not unlike the Baby Boomer story in the United States, Indian equity markets are poised to be a winner in the long term and should not be buried within emerging markets, according to UTI International.

Praveen Jagwani, chief executive of the Indian asset manager, highlights that in the last two decades, India’s NIFTY has been the best performing equity market in the world, with its top 500 stocks beating out the S&P 500, China and Australia to deliver in excess of 1,250 per cent in US dollar terms.

Jagwani said the ability of India to translate slower growth into strong equity returns compares favourably to China


“That speaks to the consistency of India’s GDP growth unlike China, where the GDP numbers have been super impressive in excess of 8 per cent per annum and it hasn’t translated into equity returns,” he told Money Management.

“Even though India’s growth is about 6.5 per cent on average, equity returns have been far superior.”

Much of this links to the subcontinent’s middle-class story, which is expected to drive 55 per cent (US$1.82 trillion) of all incremental consumption by 2031, according to thinktank People Research on India’s Consumer Economy (PRICE).

In that time period, consumer spending in the country is expected to reach US$5.16 trillion.

“The reason that the linkage between GDP and equity markets have been so strong is because India’s growth comes from middle-class consumption. It’s bottom up. Historically, in any country of the world, where growth has come from bottom-up consumption, you’ve seen equity markets do well,” Jagwani noted.

“The concept of Baby Boomers in America and the American dream are so intertwined for exactly that reason – that’s when people were having kids, they wanted a house in the suburbs, a car, a vacuum cleaner. If you recall advertising from the ‘60s, it was all about consumption and the aspiration for a better standard of living. That’s the phase the Indian middle class is going through right now.”

He adds that, while India is now the most populated country in the world, it is also a fountain of youth with an average age of 29, compared to China (39), Europe (42) or Japan (49).

“Having the largest population by itself doesn’t get you over the line because they could be poor, but having this consistent upward mobility, particularly the lower end, creates the middle class of the 2030s and 2040s,” Jagwani said.

“Having a bigger middle class means having more consumers, and if the income is rising, there are more people buying more things. India has made money for investors in equity markets through companies which produce the most ordinary, boring items like paint, bicycles, undergarments, cutlery.”

He continued: “Phrases like ‘demographic dividend’ are so overused that people have lost appreciation of it as an economic concept. But ageing countries are painfully aware that consumption is falling.”

Stepping out of EMs’ shadow

According to Morgan Stanley projections, India looks to have the third-largest stock market in the next seven years.

Jagwani agrees that by most measures, whether it’s the World Bank, Macquarie or the IMF, India is the fastest-growing large economy for the next decade.

“It will be bigger than Germany as an economy in two years, bigger than Japan in four years,” he said.

“Investing in emerging markets as a group doesn’t cut it. It’s a poor excuse because emerging markets are an aggregation of countries which have a few good countries and a lot of average countries. There’s no point generating mediocre returns when we put it all together.

“Emerging markets as a concept means nothing because the drivers of all these countries are very different. All evidence is pointing to India as an outlier in growth, and historical performance has translated into equity markets, so instead of staying buried within emerging market grouping with lacklustre performance, take a specific bet on India.”

Attractive sectors

Along with consumables that go hand-in-hand with the upward mobility of India’s middle class, Jagwani highlights financial services as an attractive sector of investment.

“In most of the Western world, financial services are looked down upon as a utility. Even in Australia, with the big four, everyone has four credit cards in their wallet, who needs more?

“In India, around 400 million people have come out of poverty in the last 10 years. They will start with a basic electronic wallet affiliated with a bank, eventually grow to afford a savings account, a debit card, then a credit card, then the next generation could be buying insurance, so the number of products sold through these banking channels keeps increasing.”

Among UTI India Dynamic Equity Fund’s top 10 holdings are HDFC Bank, ICICI Bank, Bajaj Finance, and Kotak Mahindra Bank.

Additionally, the pharmaceuticals sector has a great story in India, both from domestic and global growth, Jagwani said.

“The world’s getting older. Governments don’t have the money [for healthcare support], so you have three choices: reduce the cost of insurance or ask doctors to take less fees, which are not going to happen; or reduce the cost of medicines.

“The only real choice is cheaper medicines. This means transitioning more to generics – and who makes the largest number of generics in the world? That would be Indian pharma companies. Export-led growth in pharma and domestic consumption of not just medicines but lifestyle, like vitamins, it’s off the charts.”

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