India is tipped to emerge from China's shadow -India has been overlooked by investors, but it should not be ignored. -08 Oct 2010

India is tipped to emerge from China's shadow

India has been overlooked by investors, but it should not be ignored.

By Emma Wall
08 Oct 2010



If there were a popularity contest for emerging markets, India would struggle to win a medal. As the Commonwealth Games host has had difficulty enticing crowds to the sporting event, so too have investors shunned its economy in favour of India's bigger neighbour, China.

British fund investors have put £4bn more into China than into India, according to Morningstar, the analyst – China has attracted £15bn from UK-registered unit trusts, compared with £11bn for India.


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Emerging markets second wind blows in the face of short-term thinkingBut the smart money may do well not to just follow the crowd China may be the current star of the BRIC show, but India could eclipse its neighbour in the not-too-distant future.

"In the last year, the MSCI India index is up by 22pc, whereas China is up by only 5.8pc," said Allan Conway of Schroders. "China may have better short-term prospects, but India is less developed and so has further to grow. Add to this China's prematurely ageing population due to the one-child policy, and I would say on a five-year-plus view that India is the more attractive investment opportunity."

India's economy is expected to grow by about 9pc next year, and although the budget deficit is 4.5pc, very little of this is in foreign currency, making it manageable.

India's past performance has been impressive too. If you had invested £1,000 in J P Morgan's Indian investment trust a decade ago, it would now be worth more than £6,000; had you invested a similar sum in the HSBC GIF Indian Equity unit trust, it would have grown to £7,433.

Short-term performance has also been positive. In the past year First State's Indian Subcontinent fund has returned 39pc and the India Capital Growth investment trust has risen by 58pc.

The past year has been prosperous for India. A new single-party government – India had been governed by coalitions since 1991 – was elected in May 2009 and has focused on corporate governance and tax regulation. It is introducing identity cards, which will be used to tax workers more efficiently and provide income for the state.

"It used to take a year to build the same number of roads that are being constructed in a day," said Pinakin Patel of J P Morgan.

India is a domestic market, supporting its own industry rather than relying heavily on exports like Russia and Brazil. This means that it was less affected by the global economic downturn than some of its emerging market peers, and can offer investors a hedge against a European or American double-dip.

India has a lower dependence on commodities than other emerging markets, contributing just 25pc of the equity market, compared with 36pc in South Africa, 46pc in Brazil and 70pc in Russia. The more diverse market offers more stability instead, mainly being a composite of financials at 30pc and energy, which is 25pc of the market.

Future investment opportunities lie not in big cities such as Mumbai and Delhi, but in smaller centres. Investors will be able to get the growth prospects of a frontier market, but with the stability of a more developed country.

The consumer story is big in these regions. Not only are the growing middle classes buying more goods and eating more meat, but their rise in social status is encouraging more infrastructure to be built and bringing big business to the financials.

"I come from a rural part of India," said Mr Patel. "I know how much people keep under the mattress. But more people are getting bank accounts, mortgages and credit cards – which is why we chose to play the consumer trend more indirectly through the financials." Four of the top five holdings in the J P Morgan investment trust are banks.

The newly launched Insynergy Absolute India fund favours financials too. It is run by India's largest business, Reliance Group, which invests in HDFC Bank. The high savings and investment rate, 37pc of GDP, coupled with the large as yet untapped market make it a good long-term growth holding.

Other sectors touted as opportunities for growth are pharmaceuticals, technology and infrastructure.

As the Commonwealth Games have proved, however, regulation in emerging economies is simply not on a par with the Western world. Fund managers may have puffed infrastructure as an area to invest in, but who wants to invest in the kind of bridges that collapse?

"India remains a very rough diamond," said Darius McDermott of Chelsea Financial Services. "In terms of infrastructure it remains a decade behind China – in many parts of the country roads are truly catastrophic. Energy supply is a perennial problem, as is the supply of skilled workers."

Mr Patel stressed that investors should not confuse publicly funded infrastructure, which is poorly regulated, with privately funded infrastructure. "Privately funded construction has many success stories, such as the Delhi metro," he said. "India is not perfect, but it has an English legal system and a proper accounting system. We chose to work with leading companies with a good track record." The JPM fund holds Larsen & Toubro, which builds power plants, and BHEL, a builder of roads and airports – both with 40-year histories.

While the Empire may have left India with an impressive rail system, the leftover democracy has stifled growth. "The legacy of the British Raj is a heavy-handed civil service," said Schroders' Mr Conway. "The administration system is onerous and means any development applications are beset with delays."

Financial advisers are not convinced that India is for everyone, as it remains at the higher end of the risk spectrum. Mr McDermott said: "In terms of an investment case India shows lots of promise, but there are endemic problems. Given the inherent problems associated with its nascent economic boom I consider this a high-risk investment. I recommend that exposure to the region should be less than 5pc and part of a balanced portfolio."

He suggested the more cautious strategy of getting exposure to India through an emerging market fund such as Allianz BRIC. For investors set on a specialist fund he recommended Fidelity India Focus Fund.

Charlie Nicholls of Investment-advice-online.com backed First State Indian fund or Invesco Perpetual Asia.

"India only has a 20-year economic history, compared to China's 35-year one," said Mr Conway. "In five to 10 years China will slow down and India will consistently grow each year faster than China."