India’s election is unlikely to change its extraordinary economic journey
On 19 April 2024, the world’s largest ever election began. Structured in seven phases for reaching nearly one billion eligible voters, 543 seats are up for grabs in India’s elected lower house of parliament, the Lok Sabha – similar to the House of Commons here in the UK.
Incumbent Narendra Modi’s coalition, the National Democratic Alliance, led by his party, the Bharatiya Janata Party, or BJP, will hope to secure a third term, and Modi a ruling record matched only by India’s first ever prime minister, Jawaharlal Nehru.
It comes at a dramatic time in India’s economic development and geopolitical standing in the world. Following 2023, after yet another year of strong economic growth, the country leapfrogged Britain to become the 5th largest global economy1. As it stands, it appears it won’t be slowing down any time soon.
Underpinning India’s transformation into a vibrant economy has been its political stability and economic reforms. Both seems likely to continue, according to Alliance Trust’s stock pickers focusing on India. They believe that, although India’s success has led to certain parts of the market becoming expensive, there remains plenty of investment opportunities for the portfolio.
India’s transformation
India has been the big economic success-story of the past two decades - with the hugely popular Narendra Modi and his government and their fiscal and monetary policies contributing enormously. A raft of reforms has led to simpler taxation, fewer wasteful subsidies, and more investment: stabilising India’s economic growth and boosting its future potential.
One area has been the Jan Dhan banking reforms, which have transformed financial inclusion in India: in the space of ten years, the percentage of the population with access to banking has ballooned from 35% to 77%2. This has aided in tax collection, which, in lockstep with the introduction of the goods and services tax in 2017, has significantly juiced government coffers.
Reforms in manufacturing and efforts to shore-up digital and physical infrastructure have been another area, and proved savvy against the backdrop of rising geopolitical tensions, a fracturing global economy, and global companies turning their supply chains away from the riskier environments of Russia and China. This has the potential to transform India into a global manufacturing powerhouse.
More broadly for the economy, India’s central bank, the Reserve Bank of India, has brought in inflation targeting and policies aimed at reducing food prices, which have kept a lid on inflation at a time the rest of the globe has been struggling to contain it.
Finally, there is India’s big demographic dividend lying in wait: not only does it have the largest global population, but also one of the youngest, with an average age of just 29 years. This makes for a sizeable workforce and growing domestic spending power, putting it at a significant advantage to China and its ageing population, which currently averages 39 years3.
All told, the top-down picture appears rosy, but could the election throw-up surprises and derail India’s momentum?
The largest election of all time
The broad consensus for India’s extraordinary election is that Mr Modi will win, as Alliance Trust stock picker in the region, GQG, remarks: “Modi is a popular leader; he enjoys broad-based support and is widely considered a strong favourite for re-election.”
What’s more, even in the unlikely scenario that a change of government occurs, GQG believe that economic policy won’t find itself on the chopping block:
“While there is always the outside chance of an upset, the opposition seems to be more focused on social issues rather than disrupting the economic progress.” They add that “an election upset would undoubtedly lead to short-term market volatility; however, given the structural nature of the reforms over the last decade—even prior to Modi—and the progress that has been achieved in recent years, even this may not be a catastrophic event.”
Furthermore, the stock pickers believe that, even at a local level, given officials’ focus on maintaining growth and employment, there would be little support for upsetting the economic status quo given the successes of recent years.
As such, continuity seems likely. Alliance Trust doesn’t invest at a country level, but rather takes positions as its stock pickers find great companies that are attractively valued. Given India’s successes and how far stock markets have run, selectivity is proving particularly crucial.
Investing in India
India’s remarkable economic growth has translated into good earnings growth and strongly performing stock markets. As a result, some commentators point to valuations looking a tad expensive. To some extent, Alliance Trust stock picker GQG agrees, but points out that while “pockets of the Indian stock market have recently become pricier”, it is broadly the “widely held names at the top of the market cap spectrum”. They use Hindustan Unilever as an example, the fast-moving consumer goods (FMCG) company, which is trading at around 50 times earnings4.
Yet, elsewhere across the market, GQG believes there are plenty of “very attractive investment opportunities”. As infrastructure investment ramps up across India, this includes opportunities in sectors such as energy, materials, utilities, and housing, which have historically fared poorly.
One example for the Alliance Trust portfolio is NTPC Ltd, a power generation company. GQG adds that, although it is on “16 times its forecasted earnings for the next twelve months…we believe it is justified given the company’s accelerated growth profile”.
Also included in the Alliance Trust portfolio are investments in Adani Green Energy, an independent power & renewables electricity producer; JSW Steel, a metals & mining firm; GMR Airports Infrastructure, a transportation infrastructure company; and Macrotech Developers, a firm in real estate management & development.
1. https://www.bbc.co.uk/news/world-asia-india-68823827#:~:text=India%20surpassed%20the%20UK%20as,of%20optimism%20in%20the%20country.
2. https://www.investorschronicle.co.uk/ideas/2024/01/18/how-to-invest-in-india-s-dazzling-economy/
3. https://www.gsam.com/content/gsam/global/en/market-insights/gsam-insights/perspectives/2024/indias-economic-ascent.html
4. GQG Partners; as 14/05/2024
This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of Towers Watson Investment Management (TWIM), the authorised Alternative Investment Fund Manager of Alliance Trust PLC, and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as of January 2024 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice.