Over the past decade, India has emerged as a global economic force; boasting impressive growth, a rapidly increasing middle class, and a digital economy in development. With a GDP of $3.7 trillion and projections suggesting it could become the third-largest economy by 2030, the Land of Spices might offer great opportunities for investors looking to tap into emerging markets.
In this article, the intention is to expand a bit on why India could be an interesting opportunity for someone looking to diversify their portfolio, and why Exchange-Traded Funds (ETFs) might be the smartest way to gain exposure to the Indian market.
#1 Why India? → Significant Economic Growth
India’s economy has grown at an average of 6 to 7% over the past decade, making it one of the fastest-growing major economies globally. Despite global headwinds, such as the COVID-19 pandemic and inflationary pressures, India continues to outperform emerging market peers with a near constant expanding economy (COVID-19 impacting 2020 in particular). In the graph immediately below you can see the Purchasing Managers' Index (PMI) for composites, services and manufacturing. Values above 50 mean is seen as a good indicator of economy expansion, whilst below 50 indicates contraction. One can clearly see that the Indian economy has good momentum, with PMI's clearly above 50 across the board.
Rising Middle Class & The "Demographic Dividend"
India has one of the youngest populations globally, with over 50% of its population under the age of 25. This combined with sustained economic growth, means India’s middle class is projected to reach 1 billion people by 2030, creating an enormous domestic consumer- and productivity- base. This demographic dividend is only at the initial phase.
The growing middle class, higher disposable incomes, and increased consumer spending will fuel sectors like retail, housing, and automobiles (among others). The consumption-driven nature of India’s economy will make it more resilient, with increasing domestic demand cushioning the effects of potential global slowdowns.
Going Digital The IT sector has been one of its most significant contributors to growth. Companies like Tata Consultancy Services (TCS.NS) and Infosys (INFY) have played a key role in positioning India as a global leader in information technology services. This sector alone contributes about 8% to India’s GDP. With over 800 million internet users, India’s digital transformation is fuelling growth in fintech, e-commerce, and payments.
Foreign investors and global institutions have taken note of some of the before-mentioned factors contributing to the economic growth as a whole, which is reflected in increasing Foreign Direct Investment (FDI) inflows, reaching a record $85 billion in 2023.
Many Western global companies will also most likely continue to seek alternatives to China. India stands out as a key beneficiary of the geopolitical realignment, especially with the move to diversify global supply chains. Its central location in Asia makes it a strategic hub, and its status as a democracy enhances its appeal to European governments and the US (although it's not the most important aspect for the US, of course..). This is an excellent global environment for India making it a key manufacturing- and investment destination.
#2 Why India? → An Advancing Stock Market
India’s stock markets, particularly the BSE Sensex and Nifty 50, have consistently delivered impressive returns over the last decade. The indices have consistently outperformed many global benchmarks, highlighting India’s increasing capability of using developed, domestic capital markets as a source of equity financing for Capex projects.
Valuation Metrics Compared to Peers
Indian stocks have performed very well the last decade, but how do the basic valuation metrics stack up now? Compared to other emerging markets, Indian stocks trade at a premium. However, this is evidently motivated by solid earnings growth and efficient capital use. These are also not abnormal ratios for P/E and P/B respectively for the Indian indices, but rather in line with the valuations they've had the last decade. If anything, they're actually slightly lower compared to 5-10 years ago. The market as of today seems not to be overheated.
Index | P/E Ratio | P/B Ratio | Dividend Yield | CAGR (2015-2023) |
|---|---|---|---|---|
Nifty 50 (India) | 23.60 | 4.18 | 1.20% | 14.10% |
BSE Sensex (India) | 24.30 | 4.20 | 1.16% | 13.56% |
BSE SmallCap (India) | 35.9 | N/A | 0.53% | 17.39% |
MSCI Emerging Markets | 16.13 | 1.73 | 2.55% | 1.47% |
Hang Seng Index | 9.18 | 0.99 | 4.03% | 2.43% |
S&P 500 | 28.23 | 4.97 | 1.31% | 11.88% |
Sources and References for the Data:
Nifty 50 Data: NSE India - Nifty 50 Overview
BSE Sensex and SmallCap Data: BSE India - Indices Overview
MSCI Emerging Markets Data: MSCI - Emerging Markets Index
Hang Seng Index Data: HSI - Hang Seng Index
S&P 500 Data: S&P Global & Yahoo Finance
Screener.in: https://www.screener.in/
I would suggest that, even though Indian stocks as a whole are valued at a premium compared to peers in emerging markets, the remaining potential for growth outweighs this. All the factors mentioned before in this article serve to show that.
Risk vs Reward
I don't see any reason to divert from the assessment made below by Narayan Shroff from Barclays in October 2023 with regards to Indian stocks:
"The prospects for Indian large-cap equities appear rosier than those for mid- and small-cap stocks, given the latter’s strong outperformance of late. At the sector level, domestic cyclicals like infrastructure, capital goods, financials and consumer discretionary appeal, while cyclicals like metals and technology equities may struggle more.
Despite foreign outflows of money from Indian equity markets in September, after six-straight months of inflows, the Nifty50 was up 2% that month, supported by strong domestic flows. We remain neutral on equities. From a risk-reward perspective, stocks are less attractive from a tactical perspective due to higher valuations and several positives being already priced in. That said, economic growth, investor sentiment, net investor flows and momentum remain encouraging."
Investing in India's Continued Economic Growth, not Mid- or Small-Cap Stocks
With this in-mind, especially for someone (such as myself) who's not knowledgeable enough about Indian stocks, I'm not comfortable at all selecting any individual Indian stocks, let alone Mid- or Small-Cap stocks in what is still an emerging market after all. It's simply not an option from a risk perspective.
However, I still want some exposure towards the underlying, fundamental potential of the Indian economy and primarily through large-cap stocks in the financial sector, consumer goods and other key sectors previously discussed in this note. And so, this is where I turn my attention to potential ETFs.
Why Use ETFs in This Case as Opposed to Stock-Selections or Mutual Funds?
Diversification: ETFs give you exposure to a basket of stocks, reducing the risk associated with picking individual stocks.
Cost-Effective: ETFs tend to have lower fees compared to actively managed funds, making them a more affordable option for long-term investors.
Liquidity: ETFs can be traded throughout the day; just like stocks, providing flexibility and liquidity. If you need cash quickly, you can sell your ETFs immediately just like you would with a stock.
Broad Market Exposure: By investing in an India-focused ETF, you gain access to the country’s financial markets as a whole, dominated by large-cap companies in sectors like technology/IT, finance, manufacturing and consumer goods.
In Conclusion: India-Focused ETFs to Consider
The two ETFs that best meet my requirements and profile in terms of exposure to India and a risk level I'm comfortable with would be either; iShares MSCI India UCITS ETF USD (Acc) or Franklin FTSE India UCITS ETF (FLXI).
Criteria | Franklin FTSE India UCITS ETF (FLXI) | iShares MSCI India ETF USD (Acc)) |
Expense Ratio | 0.19% | 0.65% |
AUM | $1.12 billion | $5.29 billion |
1-Year Performance | 28.34% | 29.19% |
3-Year Performance | 41.49% | 39.86% |
Three Biggest Holdings in the Fund | Reliance Industries, HDFC Bank, Infosys | Reliance Industries, HDFC Bank, Icici Bank |
Source: TradingView, as of Sept 11, 2024
To be honest, the choice between the two is not extremely important. Of course there are differences, some of which can be summarized table above, but they are relatively minor and in the end they seemingly correlate quite strongly. However, with that in mind, I lean towards Franklin FTSE India UCITS ETF simply because of the lower expense ratio which over time might prove to be quite a lot of money left on the table. With that said, all the research and writing has now made me very hungry, so now it's finally time to have some some nice spicy curry!
Please note that nothing in any of my posts should be interpreted as investment advice. I highly encourage you to do your own research.
By J
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