India is the real Asian growth story

The Indian stockmarket has risen a spectacular 150% since 2004 and the long-term prospects for the economy could be even better than China’s. But has the good news already been priced in?

Although the spotlight has been firmly on China, and with good reason, Asia’s most attractive long-term investment story could well prove to be India. The top-down (economic) and bottom-up (corporate) changes that have been propelling the Sensex, India’s most widely followed equity index, to all-time highs – it recently breached 11,000 for the first time – have been sending out an attractive message to investors.

The questions investors in India have to ask themselves are, has India changed? And if so, what price are they prepared to pay for this change? In other words, is all the good news already priced into a stockmarket that has risen 150% since the shock election result in early 2004?

This spectacular growth needs to be understood through a careful analysis of what is happening on the ground in India. On the basis of our recent meetings and travels in the country, we firmly believe that India has changed, and changed for the better. It has rediscovered its self-confidence and the entrepreneurial spirit is flowing freely once again after decades of suppression in both the colonial era, and then for 50 years under isolationist and socialist governments following independence.

This entrepreneurialism, in combination with some reform and a light-handed government, has led to high single-digit GDP growth for the past few years. It is the local economy that is driving growth, unlike in China, which is more reliant on export-led growth. And this growth is driven by a consumption boom arising from the rapidly growing Indian middle class.

India has the most attractive demographic profile in Asia, if not the globe. Of its population, 60% are aged below 30, and 100 million people will be added to the 25-44 age group by 2009. The increase in the urban population alone between 2005 and 2015 is the same as adding 1.4 times the population of Britain, so the demand for raw materials will remain robust for some time to come.

We are also impressed with corporate India, particularly in comparison with some other Asian corporate cultures. Indian companies have managements that speak English, respect the rule of law and understand the concept of the shareholder. These companies have undergone a significant amount of restructuring and rationalisation over the past 10 years. As an investment manager, I find the breadth, quality and sheer number of companies that are available for investment are bettered perhaps only by Japan. But of course, like every other country in the world, careful stock selection is still paramount.

While I have highlighted a few of the positives, and could mention more, it must be added that the picture is not entirely rosy. Poverty and illiteracy remain a huge problem in India. It is estimated that anything from 25-35% of the population lives below the poverty line, on less than $1 a day.

The other big issue facing India is its straining infrastructure. There is a lack of clear vision and a stark need for investment. Estimates suggest at least $60bn (34bn) of investment is needed over the next five years. The economy could well be held back without this urgent spending, as there is already a significant demand/supply gap in power, roads, railways and ports.

So what price are we prepared to pay for this domestic Indian growth story? From a short-term perspective, the stockmarket, by its own historical standards, is looking expensive. Added to this is a background of rising interest rates and slowing corporate profit growth. This is generally not a recipe for further short-term gains, so a certain amount of caution is warranted.

From an investment perspective, and on a longer-term basis, we remain firmly in the bullish camp on India. Any short-term correction would provide an excellent buying opportunity for investors with a longer investment horizon, and investment managers should be looking to add significantly to positions in this eventuality.

While the frenetic growth of the Indian equity market over the past two years may slow somewhat in 2006, the longer-term view remains decidedly upbeat, with GDP growth in the region of 7% expected over the next two years.

The country’s positive underlying economic fundamentals are gaining increasing attention among foreign investors, particularly from Japan, where a recently launched Indian investment fund attracted more than $750m (432m) in one morning. The Indian situation is a long way from being played out; the long-term potential is still immense.

Evidence for India’s growing role in the global political and economic picture is also mounting, not least the recent accord signed by India and the United States. Such moves add to the positive outlook for India as an investment region of choice for many shrewd investors, and it should remain an important part of a competitive global investment portfolio.