Will India Live Up to Modi's Hype?

The International Monetary Fund has predicted India will drive global growth in 2018, and Prime Minister Modi has made bold promises. What does it mean for investors?

Emma Wall 26 January, 2018 | 2:12PM




Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Joshua Crabb, Head of Asian Equities for Old Mutual Global Investors.

Hi, Joshua.

Joshua Crabb: Good morning.

Wall: So, India is very topical conversation at the moment, because of what's going on at the World Economic Forum in Davos. The IMF came out with figures at the beginning of this week saying that India would drive global growth next year, and indeed then Prime Minister Modi got up and was very positive about the outlook for India. Do you share that optimistic view?

Crabb: Absolutely. Without a doubt this is just a very, very simple catch up story to me. We've seen this really going way back over time the U.S. catching up with Europe, then Japan catching with the U.S., then Korea catching up, Taiwan and China and now it's time for India. And that productivity gain is going to drive much stronger growth than we're going to see anywhere else in the world for an extended period of time.

Wall: Now how does that translate to investors because of course economic growth does not necessarily mean stock market growth.

Crabb: Absolutely. So many people forget that. It's one of those things it's helpful and you need markets where that actually translates into outcomes that are good for an investment. Now one of the big problems you have with India, is it's a great story, and like great stories it comes with a great price. So, it's quite an expensive market, it's done very well particularly since the election of Modi.

And this is where we think you need to be not so focused on index level because there are lots of parts of the market, but you really need to delve into other – to what are going to be the specific stories that you are going to make money out of.

Wall: And what are those specific stories.

Crabb: Well for us and we've seen this starting to play out. If we think about India till now. And I'd tell you everyone would agree with the structural story. And people would tell you that structural story has been there for long period of time for the catch up. Modi is the catalyst, you've had political issues in the past we haven’t had like one I guess party dominating and now that’s the catalyst that’s changed.

This is where I guess we differ from quite a few other people because over time India has still been a decent investment case. People have owned IT services companies, pharmaceuticals companies a lot of these export-oriented companies you've got a small amount of very highly educated people at much cheaper labour cost and that’s been the story.

Now when we think about what is it going to take to take India forward from there its going to be very different. What it's going to be about, is it is going to be getting back to my point before its going to be what China, did what Korea did, what Taiwan did what the U.S. did. It's about taking underemployed people in rural areas, getting them working in full time jobs, being able to take some of that money they earn buy motor bike, save a bit of money maybe buy a house and that kickstarts it.

Now in order to do that the one thing India needs above all else is infrastructure. Power, roads, rail it doesn’t have it, anyone who's been there can see that. You can land at the nice new airports they have got in Delhi and Mumbai now, but after that there is not much and that’s what they need to do.

Now people already have the mindset that that's sort of bad in Asia because people think about the over investment in places like China. And China is going through a very different change, that's going through consumption change. And we think they are the areas you really want to be focused on. People think steel is bad, people might think that cement's bad, but these are the ones which are cheap within the market context and that’s what's important. So, these things that have been terrible for many years because there hasn’t been that growth are now going to be good investments and within the market that looks quite expensive a lot of these are still very cheap.

Wall: Is India your favorite Asian economy, or Asian stock market I should say because you do have a remit across all of Asian equities.

Crabb: Look I never try to think about it as just there is one thing to do. You need to look at multi-facets otherwise you are just betting on red and black. So, you know for us India is a market has been a very good market. Now I think it's much more about what you own within that market. In the shorter term I probably think other markets like China are more interesting, why they are cheap, they are hated.

You go back a year ago RMB was going to collapse, the banking system was going to collapse, the real estate market was going to collapse. The Chinese markets up probably 50% to 60% since the lows, it's still on the single digit multiple when you look at the HSCI and you don’t have the same structural stories maybe as much, but you've got other things going on pollution control is having massive impacts, creating massive investment opportunities. The banking sector is very cheap, generally very hated but a very attractive in the short term. And so that’s the market we quite like.

Moving to another area quite similar to India is Indonesia. Indonesia very large population, very low penetration, very similar story on fixed asset investment, not quite as clear cut on the politics, it's not quite as the same mandate that Modi has, but still that great opportunity and because of that more uncertainty at a cheaper price.

So, there are lots of other markets, talk about Vietnam like I talk about various other markets as well. Artificial intelligence to talk about something little bit more edgy, but there are lots and lots of opportunities and what we are trying to do is have quite few of these differentiated alpha sources in what we are doing.

Wall: Joshua thank you very much.

Crabb: My pleasure.

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

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Merian Asian Equity Income A USD Inc10.31 USD-0.02

About Author

Emma Wall  is former Senior International Editor for Morningstar

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