India: the "almost-perfect" emerging-market investment story
India is almost the perfect emerging-market investment story. But don’t just pile blindly into Indian stocks, says Merryn Somerset Webb. There are much better ways to invest.
Want to ride on a Shinkansen? Of course you do. Everyone wants to ride on a bullet train. But unless you get to Japan at some point in the next few years, you might find that most of India rides on one before you do.
This week, Japan's prime minister Shinzo Abe headed to India to lay the first stone in a Japanese-financed $17bn bullet train project set to cover the 310 miles between Mumbai and the industrial city of Ahmedabad. This is exciting stuff. That's partly because bullet trains are amazing in themselves this one will cut the journey time from eight hours to under three.
It is partly because the Japanese have offered a fabulous deal on the finance and are signing various other investment deals along the way. But the really interesting thing is the speed of delivery of the project: India's prime minister Narendra Modi first decided to bring high-speed trains to India only two years ago.
Two years from thought to first stone laying is quite something for a major infrastructure project. For comparison, you might note that the new tram system in Edinburgh, where I live, was first proposed in 2001. It was completed in 2014. It covers 8.7 miles. Very slowly.
"My good friend prime minister Narendra Modi is a far-sighted leader", said Abe this week. Such compliments are a rare thing in politics. Perhaps Modi is far-sighted; it is certainly true that he is prepared to make decisions that bring nasty short term pain and hit growth with a view to long-term gain.
Late last year, he brought chaos to India's economy with the abolition of two large-denomination banknotes in an attempt to move towards a clean and taxpaying digital economy. The consumer economy stalled; there were huge lines at the banks; and everyone working in the black economy found themselves having to choose between coming clean or losing their savings. But Modi held firm.
He has done the same with this summer's implementation of a national goods and services tax. It has subdued growth across the board but should pay huge dividends as it slashes corruption, simplifies the tax system and boosts revenues.
This is all good. But it is just the icing on the cake of an almost perfect emerging-markets story. India has fabulous demographics (two-thirds of the population are of working age); a booming middle class keen on consumption; a fast-shrinking current account deficit (under 1& of GDP); a government committed to housing and infrastructure spending (there is a kind-sounding "Housing for All" scheme on the go); and a low fiscal deficit (down to 3.5%).
It also has a high level of foreign-exchange reserves (about $400bn) and inflation looks to be properly under control (down to more like 2% nowadays, compared to about 6% a year ago).
Some of these things could reverse if the oil price rises again the current-account deficit would rise again, for example. But for now, while there are some worries around employment and credit growth, the macro environment looks mightily impressive (imagine how thrilled we would all be if the UK's numbers looked anything as good).
India's stockmarket looks good, too. It is one of the few emerging markets with real depth and breadth: you can get exposure to pretty much any part of the economy you want via a listed company (not all are top quality, of course, but that's not exactly an emerging-market specific problem).
Finally, it is worth noting that India's stockmarket is supported by local investors rather than just by the fickle international investors who cause so much volatility in emerging markets (they were the ones who sold so energetically when Donald Trump was elected and when the geopolitics around North Korea started to heat up last month, for example).
You will all be wanting to rush in. Don't. I am not exactly the first to point out the merits of investing in India. They are obvious to everyone hence the 23% rise in the market so far this year and the stunningly high valuations of the type of companies international investors fancy.
The average valuation of companies that make up India's benchmark NSE Nifty 50 Index is about 18 times earnings. This may come down fast as the growth-damping effects of demonetisation and tax harmonisation disappear (earnings relative to GDP are close to historical lows at the moment, and these things do tend to revert to the mean). But 18 times is still far from cheap for an emerging market.
That said, when I was asked at the FT Weekend Festival a few weeks ago if you should have exposure to India, I gave a firm "yes" in reply. You should own a starter stake and plan to buy more when the inevitable global correction comes.
You should do this via a fund. There is no planet on which someone sitting in front of a laptop in the UK Home Counties can possibly know enough about individual companies in India successfully to pick stocks (the same goes for China, by the way). If you try this and end up making money, it will have been a fluke.
So a fund it is. There are three India-focused investment trusts worth looking at in the UK, including the Aberdeen New India (LSE: ANII) and the JP Morgan Indian investment trust (LSE: JPII). But the one that looks most interesting to me at the moment is the India Capital Growth Fund (LSE: IGC). It isn't particularly cheap (it has an irritatingly high ongoing charge of 1.79%), but invests in high-quality mid- to small-cap stocks in India for the long term (most current holdings have been in the fund for three years or so). The fund has a good team on the ground, and trades on a 14% discount to net asset value, despite a sparkling record: the net asset value is up 200% over the past five years.
If India is a bit too spicy for your investment appetite, you might look at Nick Greenwood's CF Miton Worldwide Opportunities Fund. He holds a portfolio of investment trusts trading on interesting discounts. Buy in, and you will find yourself with a hefty exposure to property in Berlin via two of his holdings (Taliesin Property and Phoenix Spree Deutschland) but you'll get nice bit of India in the mix as well: nearly 5% of the fund is invested in the India Capital Growth Fund for which Mr Greenwood tells me he has "high expectations".
With a bit of luck, the returns will be good enough over the next six years for us all to ride on a bullet train.
This article was first published in the Financial Times