The Head of Equities at Ashburton visited us this week, to discuss their India Equity Opportunities Fund. The MSCI India TR USD has produced “stellar” returns in US Dollar terms over the past three years, even in the eye of the current emerging market storm. But what are the structural growth drivers and the macro case that makes this market so attractive?
The primary short term reason is that India is a major beneficiary of lower commodity prices, unlike many of its BRICS cousins that are commodity producers and suffering big growth slowdowns and currency weakness.
However, a much more important long term driver is political and economic reform. The below Ashburton chart shows the matrix of tax reforms, governance and regulatory changes, land bills and labour market reforms all contributing to India’s better macro outlook. India’s Prime Minister, Narendra Modi, is a popular reformist and is seen to come from a grass roots level, not the Delhi Elite, and has an enviable reform track record at state level.
To date, the most important reform he has supported appears to be the implementation of a Goods and Services Tax “GST” across the whole country. With all regions in India operating like individual countries, GST has been discussed for many years, or even decades, without result. In fact many multi-national companies have needed to set up separate company structures in each region, which is burdensome and obviously open to corruption and interference. With so little Income Tax collected across India, this revenue collection channel for the government is extremely important and will hopefully ensure the future need for only one corporate structure.
Perhaps the biggest reform, not yet widely heard of, is that the Governor of the Reserve Bank of India (RBI) recently announced several important monetary policy actions, to improve financial stability. Inflation appears restrained, the RBI is cutting rates and soft global commodities prices are all helping.
It is important to understand that not all Indian states are equal and Ashburton produced data to highlight the different GDP growth rates across 15 states – from Delhi to Bihar, Rajasthan to Punjab. Which is why both stock picking and region selection has traditionally been very important within Indian Equities.
Certainly all the stars appear aligned from a macro-economic and reform perspective. But that is only half the story!
Indian Investment Opportunities
