Prime Minister Narendra Modi’s immediate challenge as he starts a second five-year term following his resounding election victory last month is boosting growth and restoring confidence in the economy, especially in rural areas.
First-quarter GDP growth of 5.8% year over year was the slowest in 20 quarters. The economy grew by 6.8% in the 12 months through March, down from 7.2% a year earlier. The Confederation of Indian Industry recently urged the country to “think big” and aim for GDP growth 10% a year. We agree about thinking big, and we hope the prime minister and his team, including Finance Minister Nirmala Sitharaman, will continue a bold reform agenda and provide a positive backdrop for investors.
The Modi government and its predecessors have made good progress in areas such as demonetisation, and revamping bankruptcy laws and goods and services taxes-all of which improve efficiency in the economy. The government can now stimulate growth by spending on infrastructure improvement, which is chronically poor when compared with many other Asian nations, and pushing through additional tax reform. The Reserve Bank of India may also have room for additional stimulus.
We find plenty of great companies in India, companies with sustainable competitive advantages that can deliver consistent, high-teen percentage or better annual returns. Many of our investments are in companies focused on the domestic economy, a play on what we see as a compelling medium-term outlook for per-capita income expansion.
The largest active holding in our Global Emerging Market Fund is HDFC Bank, a well-disciplined financial institution that is expanding in a market dominated by state-owned banks. Another holding is Godrej, the consumer products company with very strong management and good exposure to rural India. A third holding is Eicher Motors, the manufacturer of high-end Royal Enfield motorcycles.
Whilst we are investing in India for the long term, the thing we struggle with at the moment is buying shares in quality businesses at the right price. Since the election, there has been a run up in prices that were already high-some call it a “hope rally.” The MSCI India is trading near the top end of its historical valuation range, around 18x forward earnings currently vs 12x for the MSCI Emerging Markets Index.[i]
Indian shares may also have been benefiting as an alternative China play for some investors amid China’s trade ructions with the US President Trump’s decision to end India’s preferential access to the American market presents the Modi government with its own trade challenge, however.
India, with 1.3 billion citizens and a stable, democratic government, is a huge and attractive market with wonderful demographic tailwinds. It will pass China to become the most populous country in the next 10 years, according to some estimates, and its relatively young population will lead to increased household formation and expanded consumer spending.
Prime Minister Modi introduced some successful reforms during his first term. We are hopeful that he and his team can match their recent election success with equally deft handling of the economy in the next five years. It won’t be easy, however we believe India remains an exciting country to invest in for the long term.
[i] MSCI data, as at 31/5/2019