Speaking on one of the world’s largest and fastest-growing economies, Fund Manager of the India Capital Growth Fund (LON:IGC), David Cornell, told the UK Investor Magazine what to be excited about as India recovers from the Covid slump.
What makes India’s economy tick, and how is it innovating?
According to Mr Cornell, India’s tech sector continues to enjoy healthy growth. However, unlike Apple and Amazon in the US, most of India’s big tech companies are private and unlisted, and therefore hard to get exposure to. What investors might do though, much like the India Capital Growth Fund, is look to get exposure to companies such as ICICI Lombard, an insurance company currently adding tech solutions to their operations. One advantage to taking this route, Cornell says, is that should India’s tech companies start trading publicly, they’ll have the same disadvantage as Western tech stocks – that being, that they’re ‘keenly’ priced. Therefore, by investing in Indian companies that are adopting rather than producing tech, you might stand a better chance of getting value for money.
Another consideration to note is that most largescale tech activity in India is service-focused, rather than product-focused. In practical terms, this means that the growing, IT-skilled Indian workforce is catered towards maintenance and development applications, software and services, as Fortune 500 companies utilise cheap Indian labour to provide software support.
Cornell adds that while India might currently be seen as a prime location for outsourcing, the continued push for digitalisation brings with it ‘huge potential for innovation’. He reiterates that much of the existing innovation is still occurring in the private market, but adds that online grocery and restaurant delivery, and consumer activity, are growing rapidly, and that Indian mobile users consume an average of 14GB of data per month – twice as much as their Chinese counterparts.
Cornell also states that the India Capital Growth Fund are positioning themselves for what they anticipate to be a future boom in Indian manufacturing. At present, the country’s manufacturing base is low, and currently two to three decades behind most Asian manufacturers in terms of quality. Going forwards, though, they notice that prime minister Narendra Modi is trying to leverage manufacturing with incentives for domestic goods and production, and in turn see some potential for future – if incremental – progress.
Where will the opportunities be in India after Covid, and who will be at the forefront?
A key differentiation between India and other high-growth economies is that it wasn’t Covid that ended their rise. Instead, India’s growth trajectory had already slowed to almost half of what it had been a few years earlier. What we might say is that Covid slowed the Indian economic recovery. With growth beginning to pick up pace towards the end of 2019, India was among the worst-affected by the pandemic, which saw its economy contract by 24%.
What is important to note, though, is that coming out of lockdown, the Indian government is putting energy into making the country appear a reliable alternative to China. This is being led, primarily, by Modi’s reform agenda plan. In the short-term, Cornell expects this to damage earnings but that in the long-term, it will have largely positive impacts. Reforms will fast-track India’s ‘digitalisation transition’ but more importantly, its aim will be to shift the country’s way of doing business away from patronage, bribery and corruption, to a rules-based system with clearer laws and regulation. Between bankruptcy laws; demonetisation of the economy; introducing the indirect tax system; and ‘tightening up’ regulations across different sectors, Cornell says a lot of the hard work has already been done. And, although investors might not have enjoyed the benefits of these changes just yet, India looks to be in a strong position post-Covid. Cornell thinks that country’s GDP and earnings growth are currently in a cyclical low, and that now is a great time to invest:
“If the economy starts to grow from 4% GDP growth, back up to the long-term average of 7%, or even the potential growth of 8 or 9%, then investors are going to have a jolly good ride.”
In terms of where future growth will be realised, Cornell thinks that the process of aspirational Indians ‘levelling up’, will offer investors the ‘biggest opportunity on the planet’.
Social mobility will inevitably take time. At present, around 70% of India’s population live rurally and in poverty, and the country’s GDP per capita is $1,900 – little above where Mexico was four decades ago, and less than a quarter of China’s GDP per head. According to Cornell, the inflection point is $1,500, but if a country’s per capita GDP hits the significant benchmark of $2,000, consumerist behaviours begin. At this point, “everyone starts buying washing machines, phones, laptops, and begin paying for university education”, and consumption slowly takes the place of subsistence as the norm.
Also, with India having an especially young population, spending appetite will likely be secondary to saving and financial prudence. So, with a potential of 400-500 million Indians potentially entering the consumption phase in the future, investors ought to be aware that consumer goods will thrive, as the percentage of wallet spend dispensed on subsistence goods, falls.
Who are the India Capital Growth Fund, and how are they navigating the Indian economy?
The company are a London Stock Exchange-listed, closed-ended investment trust. It focuses on small and mid-cap Indian companies, which allow it to take longer term views on positions. At present, Cornell says investors have the benefit of buying into the company at a discount to its NAV, as its shares are trading at an 18% discounted value.
The India Capital Growth Fund has also taken advantage of Covid volatility to reshape its portfolio, including efforts to reduce its exposure to the financial and auto component manufacturing sectors. It added that a couple of new themes have emerged, including the acceleration of online consumer activity, which Cornell stated is, “growing like a weed, as investors and consumers are trapped at home”.
Further, they are interested in the ‘China plus one’ strategic approach. This anticipates India’s efforts to act as a recipient of companies looking to diversify their supply chains outside of China It also appreciates both the diplomatic tensions between China and the West, and the fact that the Indian workforce speak English, and are paid around a third of what their Chinese counterparts would demand.
Looking ahead, we should not just see India as a volatile, developing economy, and burgeoning superpower. With the country already moving from 135 to 60 on the World Bank’s ‘ease of doing business’ ranking; shifting from importing electrics, to manufacturing LEDs for the world’s biggest tech companies; and the ICGF noting that the country is gaining market share from China in pharma ingredients, customised research and specialist chemicals – investors ought to think that the Indian economy still has a lot more to give.
