India is the New China for Investment Returns

Missed out on the China bull market? Invest in India instead, says Rathbone's Ed Smith, as demographics, politics and consumption look set to deliver double digit market returns

Emma Wall 22 August, 2017 | 10:29AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined today by Rathbones' Ed Smith, to talk about India.

Hello, Ed.

Edward Smith: Hello, Emma.

Wall: So, last week marked the 70th anniversary of Indian independence and you've been drawing some interesting parallels with India right now and China at the turn of the millennium saying that this maybe an advantageous time for investors to join the Indian market?

Smith: Absolutely. And a lot of that is to do with the government policies. So, one of the reasons why China grew so much over the last 15 years and India lagged behind is because China had a government that was all about facilitating investment and India was mires in bureaucratic lassitude that has meant today it is very underinvested.

Now, Prime Minister Modi has finally started to break that bureaucratic lassitude; important milestones have been reached such as the Goods and Services Tax overhaul. And he has got some other interesting policies which suggests that he may make it easier for businesses, for foreign investors, for domestic investors to invest in the productivity-enhancing technology that enables a country to grow.

Wall: And another tailwind for India is the demographics and we're constantly hearing here in the U.K. how we are over-weighted in terms of our elderly dependents. The same problem is happening across Europe and indeed, even in Japan. But India is in a bit of a sweet spot for demographics, isn't it?

Smith: Absolutely. So, India's working age population today is about the same as China's was in the year 2000. But because of more favorable demographics, India's working age population is going to overtake China's by 2025. So, a much stronger demographic dividend to growth.

That could have some interesting implications for global prices. We know that inflation is low in no small part because China's working age population joined the global workforce. If India starts to open up, starts to take more of this – a bigger share in global trade, particularly services trade, which hasn't really yet been globalised, we could see some interesting inflation dynamics from that in the West, too.

Wall: Of course, China has been a great place to be over the last 20 years. But China today is probably more synonymous with negative investment sentiment than it is positive. So, saying that India is the new China may ring some alarm bells for people. If you want to enter into the Indian stock market now, should that be a concern, growth that happens too fast, a switch in demographics, interesting political interference in the stock market, for example, that has mired China in recent years?

Smith: Yeah, absolutely. So, I spoke about China's policymakers being all about investment. After sort of 12, 15 years that started to turn into overinvestment, into excess investment and a lot of it was funded by debt and a lot of that debt has been put into wasteful projects. We know that the productivity growth in China has declined precipitously.

So, we've got to watch for pockets of excess in India, excess investment, investment being channeled into the wrong places to suit local government's officials' targets, that sort of thing. Fortunately, we are a long way from that in India. India remains very underinvested. We're a long way off some pockets of overinvestment. But absolutely, we need to keep an eye out for that. But hopefully, it's not going to be for another 10 years or so.

Wall: Ed, thank you very much.

Smith: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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