India is arguably one of the most compelling investment destinations of the so-called “BRICs” (Brazil, Russia, India and China) and a recent Moneyweb article from Peter Nurcombe-Thorne gives great insight into the region from an investment perspective. However – much like Africa – investors need to be wary of simply treating it as a one-size-fits-all part of their portfolio.
Indeed, India is a big economy and it is benefiting from high levels of foreign direct investment. Consulting group EY recently noted:
“India’s global middle class, meanwhile, at around 50 million people, or 5% of the population, is much smaller. We expect this to grow steadily over the next decade, reaching 200 million by 2020. After this, we expect growth to really accelerate, reaching 475 million by 2030 and adding more people than the Chinese to the global middle class worldwide after 2027.”
However, McKinsey make an important observation in a January 2017 research note which points out that while India is growing rapidly, it is still having to import significant amounts of capital goods to service this growth. As capacity develops internally, one can expect domestic players to be a big beneficiary.
McKinsey goes on to identify 7 key investment opportunities:
- Environmental solutions
- Building logistics infrastructure
- Aerospace and defence
- Power generation and distribution
- Basic materials
- Food and agriculture infrastructure
Barring a major geopolitical event involving either Pakistan or China, it is clear that India is one of the most compelling investment stories over the next decade.
Assuming that South African investors have limited knowledge of the Indian investment universe and will gravitate toward exchange-traded funds (ETFs), as opposed to individual businesses, this is where we believe it gets interesting.
Our job as asset managers is to balance risk against reward. Both the iShares India 50 ETF and the iShares MSCI India ETF are trading on historical price to earnings multiples of just under 22 times earnings, which is viewed by analysts as being in “overvalued” territory. On top of this, the average dividend yields for the two ETFs are 0.2% and 0.51%.
If we believe that domestic businesses are likely to be the more compelling growth sector, then we would suggest looking at the iShares MSCI India Small-Cap ETF, which tracks 257 high-growth small- and mid-cap businesses. This ETF trades on a price to earnings multiple of 22 but offers a dividend yield of 2.2%.
The current mix of the assets is exciting:
- Consumer Discretionary (22.63%)
- Financials (18.33%)
- Industrials (16.63%)
- Materials (12.37%)
- Information Technology (7.92%)
- Utilities (5.51%)
- Healthcare (4.92%)
- Consumer Staples (2.76%)
- Telecommunications (1.47%)
- Energy (1.19%)
Many South African investors are unaware that they can access the Indian market through local providers (including Capilis) from as little as $1 000. We believe that South Africans should be aware of these opportunities and should be diversifying their portfolios to include international assets and high-growth businesses in India have a lot to offer.
Capilis Asset Managers is a registered South African Financial Services Provider. The company assists retail investors with a variety of structured portfolios with a particular focus on offshore investing through equities and exchange-traded funds.