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Is your South African portfolio diversified if you invest in India?

India’s economy is growing at a faster pace and Foreign Direct Investment is on the rise.

The beginning of a new year is a good time to re-evaluate portfolios and investigate new ideas and opportunities. Traditionally, conventional wisdom metered out to South African investors was that as South Africa was classified as an emerging market, any discretionary investment should be in developed markets to add both diversification and a counterfoil to the volatility of local returns. However, the lack of growth in developed countries has prompted a review of this advice.

For many years Brazil, Russia, India, China and South Africa have been associated with broad-based economic growth. Since the financial crisis and the reduced demand for commodities however, this has changed. 2016 data from the World Bank shows that while India and China grew at 7% and 6.7%, South Africa’s growth rate was almost flat at 0.4% and Brazil and Russia contracted at -3.4% and -0.6% respectively. The drop in demand for commodities coupled with political uncertainty has clearly affected the prospects of commodity producing countries like South Africa, Russia and Brazil.

For the purposes of this article I have decided to compare South Africa to India to test the theory that South African investors are better served by steering clear of investing in other emerging markets. A direct comparison between the two countries highlights their similarities and these challenges would most likely hold true for most emerging markets.

Figures in the table below highlight a high burden of disease in with relatively low life expectancy relative to global norms as well as high percentage of both populations countries classified as ‘unskilled’.

The statistics also highlight ‘technological leap frogging’; in both India and South Africa access to telephones or cell phones (63% and 89% respectively) is higher than access to a toilet.

Unemployment levels in both India and South Africa are high by world standards and both countries have large informal employment sectors. All agencies seeking to capture unemployment rates in India report that capturing data is very difficult as over 80% of Indian workers work in the informal sector. Many are classified as agricultural workers with seasonal work only, while others only do ‘casual work’. The official unemployment rate is about 5%, but the International Labour Organisation puts it at 7.6%.

In South Africa latest figures published by Statistics SA show that out of a work force of nearly 22 million, there are about 5.8 million unemployed people, with a further 2.2 million ‘discouraged work seekers’. If discouraged work seekers were included in unemployment statistics, over 35% of South Africans would be classified as unemployed.

Neither India nor South Africa score well on perceptions on corruption or ease of doing business.

Human Development Index scores

 

India

South Africa

% urban population in 2015

World Health Organisation data estimates the urban population at 33%.

World Health Organisation data estimates the urban population at 65%.

Illiteracy levels[i]

As per the Census of 2011, the illiteracy rate in India is 22%. About 61.6% of men and 38.4% of women have studied up to graduation or above.

According to the General Household Survey 2015, the ‘functional illiteracy rate’ in South Africa is 15.4%, while the (self-reported) literacy level for over 20s is 93.7%.

Life expectancy at birth[ii]

Men 67, Women 70 (2011)

Men 61.6, Women 64.6 (2014)

% cause of death TB[iii]

10.1% of deaths of people age 25-69

8.4% (2012, Stats SA)

% of households with toilet[iv]

2015 data from the Joint Monitoring Programme (JMP) for Water Supply and Sanitation by WHO and UNICEF states that 54% of Indians either share or do not have access to a toilet.

2015 data from the Joint Monitoring Programme (JMP) for Water Supply and Sanitation by WHO and UNICEF states that 26% of South Africans either share or do not have access to a toilet.

% unbanked population[v]

41%

19%

% of the workforce that has completed secondary education or higher

As per the Census of 2011, 30% of the Indian workforce has attained an education level of ‘secondary’ or higher.

According to Stats SA, 2014 figures classify 25% of the SA workforce as ‘skilled.’

% of households with a telephone/ cell phone

Census 2011 data on houses, household amenities and assets reveal that 63.2% of homes have a telephone.

2014 research from the Pew Research Centre states that 89% of South Africans have cell phones.

Unemployment levels[vi]

Estimates of unemployment level range from official unemployment estimates of 4.9% to an International Labour Organisation estimate of 7.6%. Note that these statistics ignore the informal economy.

The latest Quarterly Labour Force Survey (Q3 2016), published by Stats SA reported that the official unemployment rate was 27.1%, with a labour participation rate of 59.1%

Youth dividend (people aged between 15 and 34)[vii]

34.85% of the total population (2011 stats)

36.5% of the total population (2014 stats)

Economy and business-related measures

Corruption index[viii]

76th out of the 168 countries surveyed

61st out of 168 countries surveyed.

Ease of doing business[ix]

India ranks 130 out of 189 countries in the Ease of Doing Business Index moving up four places from last year’s adjusted ranking of 134.

Ease of Doing Business in South Africa deteriorated to 74 in 2016 from 72 in 2015.

Inflation level[x]

CPI increased to 3.41% y/y in December

6.8%y/y in December.

Business confidence levels[xi]

Business Confidence in India increased to 57.20 in the second quarter of 2016 from 54.10 in the first quarter of 2016. Business Confidence in India averaged 57.95 from 2005 until 2016.

The RMB/BER Business Confidence Index for South Africa declined to 38 in the fourth quarter of 2016 from 42 in the previous period as confidence dropped in motor and retail trade sectors and to a lesser extend in wholesale trade

While both countries clearly share the same challenges, it is in their differences that the prospects for diversification and above average investment returns may lie.

India’s government is business friendly

India’s government led by Prime Minister Narendra Modi is pro-growth and is considered business- friendly. Modi’s party, the Bharatiya Janata Party (BJP or Indian People’s Party), BJP came to power in May 2014 winning a convincing majority of the 543 seat parliament in a general election with a voter turnout of 66.38%.

In the run-up to elections, Modi promised to revive the economy with neoliberal economic policies which prioritised globalisation and economic growth over social welfare. The election result was a blow for the Congress party, led by the Nehru-Gandhi family since independence.

Critics of the South African government complain that government policy has shifted to the left since 1994 prioritising social security above growth in a way that undermines both. In 2017 Treasury is facing a R30 billion budget shortfall due to higher government spending and lower tax revenue due partly to the fall in commodity prices and the global economic slump.

FDI is increasing in India and decreasing in South Africa

According to 2015 figures from the United Nations Conference on Trade and Development (UNCTAD), India is ranked 10th in the world as a host of foreign direct investment in billions of dollars, with an annual investment of $44 billion. This represents a 26% increase in foreign investment in India from 2014.

These figures suggest that the Modi government’s efforts to encourage more global companies to “Make in India” are reaping some success. Foreign investments worth $28.7 billion in “greenfield” manufacturing projects, or those that start from scratch, were announced in India last year.

In 2015 the Modi government began allowing foreigners to own larger stakes in Indian companies in insurance, construction, mining, manufacturing and others. More recently, new increases in foreign-investment limits in defence, retail, civil aviation, pharmaceuticals and grocery businesses were announced.

In South Africa, foreign direct investment is declining. According to figures published by Trading Economics, in 2014 FDI into South Africa decreased from 2013 levels by 69% to $1.8 billion, which was the lowest level in 10 years. According to Trading Economics this was due to poor economic performance, lower commodity prices and higher electricity costs. Divestments during the first quarter from noncore assets in manufacturing, mining, consulting services and telecommunications contributed to the decline in FDI. [xii]

India’s economy is growing at a faster pace

Figures from the World Bank suggest that of all the Brics countries, India grew the fastest in both 2015 and 2016, with the fasted projected growth rate for 2017, 2018 and 2019.

Source: Global Economic Prospects, Weak Investment in Uncertain Times, January 2017

Credit ratings: Similar ratings but different outlooks

Both Standard & Poor’s and Fitch credit ratings for India stand at BBB- with a stable outlook. Moody’s credit rating for India was last set at Baa3 with positive outlook.

Both Standard & Poor’s and Fitch have allocated credit rating scores of BBB- to South Africa, but with negative outlooks. Moody’s credit is set at Baa2 with a negative outlook as of May 2016.

India may be immune to sluggish world growth because of projected consumer growth. South Africa’s consumer growth phase is over for now

Current threats to the global economy include stalling global trade and heightened policy uncertainty. India’s growth projections are based on internal, consumer-led growth so it is possible that India might duck these international headwinds. South Africa’s re-rating of consumer stocks took place between 1994 and 2008. Using chicken consumption as a proxy, per capital chicken consumption grew from 19.59 kg/ capita in 2000 to 40 kg in the 2013-14 marketing year. Two thirds of this increase took place between 2000 and 2008. [xiii]

‘Consumer-orientated shares’ are different in India and South Africa

Most fund managers of funds with an Indian mandate have focused on the anticipated consumer boom. It is interesting to note that the profile of India’s consumer stocks and South Africa’s consumer stocks are quite different, thus offering diversification to South African investors investing in India at a stock-specific level.

A consumer-orientated portfolio in South Africa might typically invest in food companies, retailers, entry level insurers and tele communications companies while in India, some of the favoured stocks selected to express confidence in consumer spending include pharmaceutical companies, FinTech and entry level motor manufacturers.

Based on the analysis above, I believe that including an allocation to India in a diversified offshore portfolio not only increases potential return prospects but will offer diversification benefits for a South African investor.

[i] See more at: http://indianexpress.com/article/education/international-literacy-day-2016-all-you-need-to-know-about-indias-literacy-rate/. General Household Survey available at http://www.statssa.gov.za/publications/P0318/P03182015.pdf

[ii] Life expectancy at birth: According to World Health Organisation’s 2015 figures, India has one of the world’s lowest expenditures on health per capita, at Intl $267.00, as of 2014. Total expenditure on health, measured as a percentage of GDP is 4.7%. India currently spends only 1.2 per cent of its GDP on publicly funded health care.

[iii] TB is the highest cause of death in India, with estimates of 400 000 people dying each year. According to the TB Research Centre, nearly 40% of the Indian population of all ages has Mycobacterium tuberculosis infection. South Africa has the third highest incidence of TB after India and China, and the incidence has increased by 400% over the past 15 years. Out of the 450,000 incident cases in South Africa it was estimated by WHO in 2014 that about 60% of those with TB in SA have both HIV and TB infection. The latest figure from the South African Department of Health is that 73% of TB patients are HIV positive. – See more at: http://www.tbfacts.org/tb-statistics-south-africa/#sthash.P4GLmLSk.dpuf

[iv] Toilets: Data from the Joint Monitoring Programme (JMP) for Water Supply and Sanitation by WHO and UNICEF https://www.wssinfo.org/fileadmin/user_upload/resources/JMP-Update-report-2015_English.pdf.

[v] Unbanked population: According to stats released by the Reserve Bank of India in March 2016 the total number of deposit accounts (includes term deposits) was 1.44 million. The Bank of India estimates that about 41% of the population is unbanked. The South African 2015 FinScope survey showed that in South Africa levels of financial inclusion were 87%. About 31.2 million (84%) of adults are formally served, that is they have a bank and other formal non-bank product/services. For more see http://www.bankofindia.co.in/FI-BOI/images/FI%20presentation.pdf

[vi] Unemployment: According to International Labour Organisation, about 82% of workers in India work in the informal sector with no contracts, pensions or sick leave. The fifth and most recent annual employment-unemployment survey at all-India level conducted in 2013 reported that about 77% per cent of Indian households had no regular wage/salaried person. See http://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/—sro-new_delhi/documents/publication/wcms_496510.pdf

The national body charged with monitoring employment in India, the National Sample Survey Organisation (NSSO) has three measures for unemployment; ‘usual status’ which measures if a person was employed for any period over an annual cycle, a ‘weekly status’ which measures unemployment over one week. A person is said to be unemployed if he/she is not able to work even for an hour during the survey period. The ‘current daily status’ measure records the activity status of a person for each day of the preceding seven days, with the reference period of a day. In short, the longer the reference period the lower the rate of unemployment. Further, many Indians in the formal sector are underemployed or sometimes inappropriately employed as they are too highly qualified for the work they do. For many Indians and South Africans, part time and temporary employment is normal. For SA figures see the latest Quarterly Labour Force Survey, (Q3 2016) http://www.statssa.gov.za/publications/P0211/P02113rdQuarter2016.pdf

[vii] Youth dividend. The youth dividend describes a scenario where the labour force grows more rapidly than the population dependent on it, freeing up resources for households. A ‘dividend’ by definition requires a growing economy and increasing levels of employment. According to the United Nations Population Fund statistics from 2011 India has the world’s highest number of 10 to 24-year-olds, with 356 million—despite having a smaller population than China, which has 269 million young people. For more see http://statisticstimes.com/population/population-of-india.php

[viii] Perceptions of corruption: Transparency International (TI) has published the Corruption Perceptions Index (CPI) since 1995, annually ranking countries ‘by their perceived levels of corruption, as determined by expert assessments and opinion surveys’. The higher the score the lower the perception of corruption.

[ix] Ease of doing business index: The Ease of Doing Business Index ranks countries against each other based on how the regulatory environment is conducive to business operation stronger protections of property rights. Economies with a high rank (1 to 20) have simpler and friendlier regulations for businesses.

[x] Source: Trading Economics.

[xi] The index varies on a scale of 0 to 100, where 0 indicates an extreme lack of confidence, 50 neutrality and 100 extreme confidence.

[xii] For more see: http://unctad.org/en/PublicationsLibrary/wir2016_en.pdf

[xiii] Source: International Poultry Association and www.feedstuffs.com

ADVISOR PROFILE

Peter Nurcombe-Thorne

Rosebank Wealth Group (Pty) Ltd

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A local India MSCI etf would have been nice. Satrix should have brought that out instead of copying Coreshares.

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