The Indian market presents investors with a dilemma. On the one hand, the backdrop is extraordinary: India’s economy is growing and diversifying, a large and rising middle class is driving consumption, while astute government policy is helping draw international businesses to the country. The problem? After a strong year, market prices reflect much of this growth.

The Indian economy is thriving. It has been a beneficiary of China’s weakness as firms diversify their supply chains. India’s production-linked incentive (PLI) scheme for smartphones has encouraged manufacturers to set up there. Apple, for example, is pivoting iPhone manufacturing towards India, with ambitions to manufacture 25% of all iPhones in India by 2025, up from just 5% in 2022.

Increasingly, central governments, states and businesses are coming together to support development. In 2023, Micron announced that it wanted to set up a chip assembly and test facility in Sanand, Gujarat. There were extensive negotiations between the company, the State and central government to agree terms, but agreement was reached and construction began in September. This is helping create a diversified pathway of growth for the Indian economy, rather than being dependent on services or consumption.

The rising middle class also remains a key feature of India’s economic growth story and this should drive momentum in areas such as real estate. The central government is continuing to invest in infrastructure, recognising that it is a key element to support foreign investment and domestic growth.

Surging growth and hot stocks

This is the backdrop for surging GDP growth – 6.7% in 2023, and then 6.5% in each of 2024 and 2024, according to the IMF. It is also the backdrop for strong corporate earnings, which have been a key factor in driving the Indian stock market over the past 12 months. Earnings for companies in the MSCI India rose by around 20% in 2023.

However, this strength has also left some parts of the Indian market looking ‘hot’, particularly among smaller and mid cap companies. These have benefited from strong domestic flows, which have pushed up prices. There is no catalyst for a slowdown – high economic growth is likely to continue to support earnings – but we can see some areas taking a pause.

Against this backdrop, we are trying to focus on areas where there is strong visibility on growth, but valuations still look reasonable. With that in mind, we are looking at those companies benefiting from infrastructure and capex spending – Abb India or KEI industries, for example. We are also investing in communications infrastructure, including groups such as Bharti Airtel and some of the large digital online plays.

The share prices for real estate companies have been hit by fears of interest rate rises. The sector had experienced a significant downturn, from which it has only started to recover in the past three years, but urbanisation and infrastructure development are catalysts for the sector. Growth indicators are starting to show good momentum, and we are finding opportunities there.

There is a breadth of consumer companies in the market, from ‘core’ areas such as food and drink, to digital consumption groups. For core exposure, we have positions in groups such as Hindustan Unilever, but have sought to balance this with more discretionary exposure, such as Titan Industries, which is a jewellery retailer.

Green growth

The Indian government is aware of the imperative to go green. There is investment not just in renewables, but also in the broader electrification trend, including transmission and distribution. The government is forecasting an 83% increase in investments in renewable energy projects in 2024. We also see opportunities along the supply chain, such as APAR industries, which sells components.

‘Exporting talent’ is a theme we’ve had in the portfolio for some time, but this may be about to become more important as ‘China plus One’ takes hold. India is not at the stage of being a significant exporter yet, but has put many of the steps in place to build up its capabilities and ecosystems. This is an area to watch in the near-term.

Elsewhere, we see some opportunities in financials, but not necessarily in the banking sector, where there are still some headwinds. We prefer other financial services’ including insurance and fund administration, which should benefit from the ‘financialisation’ of savings in India.

We remain focused on high quality companies. This may mean that we don’t keep pace with rising markets, but it should protect investors in tougher markets. Our view is that while the outlook for the Indian economy and corporate earnings remains extremely positive, market performance could take a pause. There are risks that investors revise their very low expectations for China, for example, and there is some reallocation away from India. We will take advantage of any corrections when they arise.

India is a multi-year growth story. It is important to remember that India remains at an early stage in its growth trajectory, with GDP per capita just $2,850, around one-fifth that of China. Its growth is exciting, but it will need time to build and diversify. We will be there to support Indian companies as they grow.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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