The India equities market has been one of the best performing Asian markets this year. There were three factors driving the strong performance of India equities market. First, investors avoided the Chinese technology sector and instead bought the Indian technology sector as they were worried of the ongoing regulatory clampdowns in China. This drove valuations at many of the Indian technology companies to very high levels. Second, market investors were pricing in very strong pent-up consumer demand as India recovers from two major waves of Covid-19 infections. Third, India was enjoying several structural tailwinds with a global demand for Information Technology (IT) services, the emergence of a nascent manufacturing sector in India, improving transportation infrastructure and a reformed banking sector.
The first two drivers of today’s market optimism are temporary in nature which we will not discuss further. Below, we would like to introduce four structural tailwinds that are positive for the economy in India and by extension, corporate profits of companies listed in India.
Figures 1 & 2: Rising incomes from the IT sector
Source: Infoedge, Macquarie 26 Oct 2021
Global demand for Information Technology (IT) services
- Business transformations to enable remote transactions and interactions accelerated over the past 18 months. New e-commerce platforms like Fintech, Medtech, Edutech, as well as software and hardware as a service, also emerged.
- India is the world’s IT outsourcing center. India has an abundance of cheap and capable IT workforce. The average wage of an IT engineer is 10 to 14 times more expensive in the US as compared to India.
- Strong demand for IT engineers (as reflected in the charts above) has led to higher pay translating to a boom in the residential property market and in general strong consumption demand.
The emergence of India’s manufacturing sector
- Multi national corporations (MNCs) are increasing looking for an alternative manufacturing site to China after experiencing production and supply chain disruptions during this pandemic.
- India is also seen as a hedge to China which faces unknown risks from the ongoing US-China trade war.
- MNCs are also adopting a “just-in-case” strategy.
- India is also keen to capture foreign direct investments (FDIs) by rolling out a wide range of tax incentives.
- Typically, the development of a manufacturing sector leads to the expansion of the middle class. This is positive for the Gross Domestic Product (GDP) per capita of the nation and positively impacts consumption spending.
Figures 3: Production Linked Scheme (PLI) commentary across respective sectors
Source: Spark Research, 21 June 2021
*API stands for Application Programming Interface, Solar PV stands for Solar Photovoltaic, EV battery stands for Electric-vehicle battery
India has upgraded its transportation system
- Weak transportation links in India has historically been cited as the reason for a lack of manufacturing in India. However, this is changing fast.
- Prime Minister Modi has over the years cut down inter-state bureaucracy and the long promised infrastructure development is also finally taking shape.
- One of the key projects is the Dedicated Freight Corridor (DFC). The DFC separates cargo passenger rail which improved the reliability and lowers costs of logistics considerably. This has directly resulted in an increase in manufacturing Foreign Direct Investments into India.
Figures 4: India’s Industrial Corridors
Source: National Industrial Corridor Development Programme, 26 Oct 2021
Reformed banking sector
- The banking sector took a decade post the Global Financial Crisis to restructure and recover from the mal-investments in the commodity and industrial sectors.
- Credit growth has slowed down to a halt in the past seven years from a collapse of the retail lending bubble in 2018 followed by a financial crisis in the non-bank financial sector.
- Corporate lending is now recovering from the strong growth in the commodities, construction and manufacturing sectors.
- While, retail lending is also recovering as residential property demand is finally picking up on rising income levels.
Figures 5: India’s Industrial Corridors
Source: RBI, Jefferies 14 Oct 2021
Conclusion
Due to the high valuation of the India equities market, we are cautious that there may be correction in the short term. That said, we are positive on the long term positives from the structural tailwinds present. Investors who are looking to participate in this structural growth in the India equities market can consider the LionGlobal India Fund. The Fund aims for medium to long-term capital appreciation by investing in Indian equities and equity-related instruments. We are overweight in Financials and underweight in Utilities, Energy and Industrials. The Fund has returned 44.9% on a 1-year basis*(as at 31 October 2021).
*Past performance is not necessarily indicative of future performance. Returns are based on single pricing basis. Dividends are reinvested net of all charges payable upon reinvestment and in respective share class currency terms.
