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Weekly Comment IconAs some of our regular readers and investors will know, we have commented positively and have been constructive on Indian equities, as a potential geographic/thematic investment opportunity, for some time now. After undertaking extensive research into the universe of available funds and completing our due diligence process, Ashburton’s Indian Equity Opportunities Fund has now been added to the portfolios within both our DFM and Fund offerings.

Though we have recognised the Indian market’s potential for a long while, the catalyst for our more positive view (within the context of the broader Emerging Market universe) is largely down to a series of structural reforms that have been implemented by the BJP-led central government under the leadership of Prime Minister Narendra Modi during the last year or so:-

  • Demonetisation – culmination of steps taken to eradicate corruption announced back in November 2016
  • Goods and Service Tax (GST) – successfully implemented in July 2017; thus unifying the fragmented Indian market, resulting in improving efficiencies and growth
  • FDI reforms across multiple sectors – defence, banking, insurance construction, retail, civil aviation and infrastructure
  • “Make in India” is a national priority to generate jobs
  • The “Aadhaar” Bill is expanding the use of a ground-breaking national biometric ID system, already issued to over one billion Indians, to achieve an efficient distribution of subsidies and cut out corruption in the system. (Looking further out, this has the potential to bring banking and financial services to massive swaths of the population that are not currently part of the financial system.)

Undoubtedly the most radical among these, the effect of Demonetisation – the withdrawal, with almost no notice, of high-denomination banknotes from circulation – on India’s “black economy” has been significant. According to official figures, 99% of affected bank notes, worth US$293 billion, were returned to the financial system almost overnight, with the FT reporting that some 148,000 bank accounts received deposits of more than US$120,000, with an average deposit size of US$500,000.

While estimates suggest that as much as 96% of India’s “black money” remains stored in other forms, such as gold and property, the government’s intent is clear. With the aforementioned depositors now facing awkward questions as to how they came to have half a million dollars’ worth of bank notes just lying around, in a country in which fewer than 3% of citizens currently contribute to the exchequer, it seems inevitable to most observers that a new era of tax compliance has begun.

The positive effects of increased that government revenue, reduced inefficiencies in the economy, a more competitive environment for law-abiding firms and the reduced accumulation of black money all add to the appeal of a market in which favourable demographics and upward mobility (see chart above) are already strong positive drivers.

Though by no means the cheapest market in the EM space, Ashburton’s view that the combination of reform initiatives, surging domestic investment, increased foreign interest, strong and improving corporate governance and the transformational impacts of urbanisation and new technology make a compelling case for investment in India. Needless to say, we agree!


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