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India: Idiosyncratic and Untapped

Tim Love, investment director for emerging market equities at GAM, explores the major growth opportunities in India, such as weddings, luxury travel and Bollywood, and the equity market’s untapped potential at a time when China growth is showing signs of slowing.

7 November 2017

Indian equity markets have been one of the top performers in the EM equities space over the last year, soaring by around 25% in the 12 months to the end of October. And we believe there is more to come as the country rides the wave of growth led by recent policy overhaul and a young burgeoning cash-laden middle class keen to spend money.

While India has lagged China’s growth levels for the last five years, we believe that it will follow a similar trajectory, replicating some of its key economic achievements. According to recent IMF statements, the goods and services tax (GST) will bring India’s GDP growth rate to over 8% per year in the medium term (versus 6.5% at present). The implication of this comparison is that the aggregate India consumer-spending market is vast and five years behind the exponential take-off that we have witnessed in China.

On the global stage, India has always been recognised as a strong player in generics, consultancy services and auto parts. However, post-Prime Minister Modi’s reform programme, broader areas of consumer growth are now offering attractive risk / return profiles. In our opinion, these include portfolio exposure to the wedding industry, confectionery, Bollywood, luxury travel and scooters to name but a few.

Gold and chocolate

According to Alex Kuruvilla, head of India for a leading mass media company, the average Indian spends about a fifth of his lifelong accumulated wealth on their son or daughter’s wedding. This astonishing statement lends itself to the industry’s confident growth of 25-30% YoY, predicted to be worth circa USD 50 billion by 2019. Naturally, this creates several investor opportunities, but the most enticing one is the gold industry.

It is a tradition to offer gold gifts during wedding ceremonies. The industry alone transacts over 400 tonnes of gold per year and if the estimated growth of weddings continues, gold market transactions will reach exceptional values.

The wedding industry is not the only one to reach dizzying new heights. A supportive factor for Indian equities is the country’s vast, youthful and cash-laden middle class who are keen to indulge in luxury items. Confectionery is no longer an annual luxury and is instead enjoyed on a regular basis by sweet-toothed Indians. Today, the average Indian shopper buys around 0.15 kgs of chocolate per year, compared to a generous 6 kgs bought by the average UK shopper. This potential, combined with YoY consumption growth of 13%, presents an incredible opportunity. Although these sugary treats may come with a bitter aftertaste as their rise in consumption could potentially result in more cases of diabetes and obesity, this may in turn boost the healthcare sector. Unsurprisingly, chocolate is on the highest tax bracket of GST with VAT of around 28% to try to dampen this demand, but for now, consumption is showing few signs of slowing.

Bollywood and travel

Meanwhile, the Indian travel and tourism industry is worth USD 112 billion (about 7.5% of the Indian GDP) and is expected to double in value by 2024. Indian travel companies are capitalising on the rise in the number of middle class Indians holidaying abroad, many of whom have developed a liking for luxury destinations such as Mauritius, Dubai and the Maldives. A number of these resorts can also cater for the Indian palette, such as strict vegetarian diets.

India’s film industry Bollywood is also set to explode further. Bollywood produces more than double the movies of its US counterpart (about 800 per year) with some two billion avid cinema viewers. As of today, 1.4% of the Indian population goes to the cinema regularly and spends the equivalent of a day’s wages. If combined with a predicted growth of around 30% until 2020 and a rise in the disposable income of the middle class, exceptional revenue growth is to be expected here.

The country is also home to the largest number of scooters, with around 16.5 million in 2016. They offer easy mobility within dense city centres and are also rapidly becoming popular with commuters from rural villages. With the urban population expected to rise to 41% of the total population by 2030 (presently 1.3 billion growing at over 1.2% p.a.), this will ensure a high demand for this vehicle.

The fundamental strength of the Indian economy and attractive valuations makes India a compelling place to invest in. Also, the country’s recently rolled-out GST bill which represents a major milestone for the economy, has already boosted equity markets.

But for India to remain a long term attractive destination for foreign corporations to set up shop in, an on-going reform of corporate governance and fair treatment of foreign corporates on historic tax issues will be key.

As an asset class, Indian equities are not without challenges, but careful stock selection should continue to yield attractive returns.



Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.