For Investors in India, Reform Equals Opportunity

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Punita Kumar-Sinha, CFAIndian equities stand to benefit from continuing government reforms and a manufacturing renaissance, according to Punita Kumar-Sinha, CFA, founder and managing partner at Pacific Paradigm Advisors. India’s stock market is well diversified across sectors and under-owned versus its emerging market peers, and Kumar-Sinha expects foreign investment in India to surge as reforms take hold and investors search for growth. As a result, she expects Indian stocks, up nearly 20% over the past year, to move higher.

Kumar-Sinha’s upbeat outlook was in stark contrast to the sober, if not downright gloomy, prognosis for Europe that delegates heard from a host of speakers earlier in the day. Much of the promise of India lies in how far it has to come in terms of economic competitiveness and its commitment to reform. Kumar-Sinha noted that India ranked 142nd in the World Bank’s most recent ranking of 189 economies based on the ease of doing business. Clearly, changes were in order, and Kumar-Sinha detailed many of the aggressive actions undertaken by Prime Minister Narendra Modi since he took office in May 2014.

These include:

  • Fiscal consolidation and reform: Tighter fiscal management has cut expenditures, consolidated programs, and curtailed subsidies. Tax reforms include a shift of revenues to the states, the introduction of a goods and services tax, and a corporate tax cut.
  • Manufacturing revival: India’s “Make in India” initiative is designed to attract more foreign direct investment, improve the sorry state of the country’s infrastructure, and help India move away from its dependency on service-based industries.
  • Infrastructure investment: Considerable resources are being directed to the construction and improvement of railroads, roads, ports, and urban housing.
  • Reduced bureaucracy: Decision-making processes within government have been streamlined in an effort to eliminate red tape, increase transparency, and be more responsive to business.
  • Banking sector transformation: New banks are being licensed at a faster pace to help meet growing consumer finance demand.

Kumar-Sinha highlighted several investable themes emerging from the changing business climate in India. They include:

  • Infrastructure and deep cyclicals: The Indian government’s focus on stimulating the industrial and manufacturing sector, the creation of a $3.2 billion National Investment and Infrastructure Fund, the opening of the coal sector to commercial mining, and favorable interest rates should serve as catalysts.
  • Financial services: India has a large and relatively young working population seeking access to financial products, and consumer debt levels and mortgage penetration rates are also significantly below those in comparable economies. As a result, the consumer finance market is expected to grow at a compound annual growth rate of 18% over the next five years.
  • Digital economy: India’s per capita income is expected to increase by 150% over the next decade, and India now has 300 million internet users, making it the second largest internet market after China. India is also expected to have the world’s fastest growing e-commerce market, which should attract significant foreign investment capital.
  • Pharmaceuticals and health care: The Indian pharmaceutical industry has established itself as a leading manufacturer of complex generic drugs, its hospital industry is seeing significant growth, and India is emerging as a medical tourism destination because of its low cost, skilled doctors, and advanced technology.

What could go wrong? Kumar-Sinha cited political opposition to some of the reforms Modi is trying to put in place as a potential pitfall as well as the geopolitical risks that come with living in a “dangerous neighborhood” and the execution risks that typically come with the implementation of substantial reforms.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo credit: W. Scott Mitchell

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