The latest Emerging Markets Equity Podcast episode – the show that explores the factors that underpin our thinking on emerging markets – turns the conversation to one of the more expensive emerging markets: India.

On the back of a strong economy with reopening momentum and easing political risks, Host Nick Robinson sits down with Asian Equities' James Thom to hear about his recent trip to South Asia, as well as cover India's …

  • Investment opportunities and risks
  • IPO pipeline
  • Green economy
  • Upcoming election


Nick: Hello, everybody. This is Nick Robinson from abrdn and you're listening to the Emerging Markets Equity podcast, the show that explores the factors that underpin our thinking on emerging markets. We ask our expert guests the big questions from key individuals to evolving trends, all with the goal to identify and profit from opportunities in the region. So, what are the challenges of EM investing is just how volatile country returns can be each year, and last year was no different. On one side you had China, where we pretty much saw investors throw in the towel on the various difficulties they face, including the weak economy, the sluggish property market and the like. And then meanwhile, on the other, you had countries like Mexico and Taiwan, which have been bolstered by some of the big EM themes this year, like nearshoring and AI. Today, we're going to talk about one of those countries at the upper end in terms of returns, India. So, India did pretty well last year on the back of a strong economy with reopening momentum, as well as easing political risks towards the end of the year. However, it also stands out as being one of the more expensive emerging markets. So, it's really not that cheap to get exposure to the stable, a growing democracy. So, to discuss today what's going on in the country and how we should think about investing there. I'm delighted to be joined by my colleague James Thom, who has recently returned from India on an investment trip. James is based in Singapore and amongst other things, James runs our India focused funds. So, he's very close to what's happening on the ground. James, thanks for joining today. It's great to have you on.

James: Thanks, Nick. Great to be with you and always a pleasure to talk about India.

Nick: Brilliant. Well, let's get started. And I think this feels like a particularly timely time to have a podcast on India, given how the performance of the country really rocketed in the last quarter of the year. So, you just got back from India. Why don't we start there and perhaps you could tell us a bit about the mood of corporates and what they're saying about the current environment.

James: Yes. So, the first thing I'd say is that Indian corporates tend to be kind of glass half full types rather than glass half empty. And so generally are a fairly bullish bunch. And as a fund manager, it's wise to sometimes kind of temper your enthusiasm somewhat around that. But having said that, on this trip, it was a very bullish tone to the discussions that we had with corporates across both Mumbai and in Delhi, even more kind of constructive and positive than normal, I would say. So, it's the mood is bright and that really is quite a stark contrast to the to the rest of the world as we know. And why is that. Well, it's a reflection of the growth and the opportunities that these companies and management teams are seeing in India at the moment. And I think just to put that into context, before the pandemic, India had been through a number of years of kind of subpar growth, and it was just getting back to a better rate of growth in 2019 and then, of course, the pandemic hit. So now it's sort of playing catch up, I think. And we're seeing that accelerating economic growth story come through quite strongly.

Nick: Okay. That's great. And yeah, it was particularly striking how India had a really tough pandemic. I remember we did a podcast around that time and it was, yeah, I recall what a tough time it was for the country. Why don't you tell us a bit about politics. I mean, 2024 is a pretty big election year in emerging markets, and India is the largest democracy as a, is a fairly key one. Modi seems to remain popular. But to me, as an outsider, it looks like, you know, as a prime minister, that's been around for a while his reform agendas may be getting a bit tired.

James: Yes. I mean, I guess that's a fair comment. He is now in his second term and running for a third term in office. And earlier in his kind of administration, we saw some very big bang reforms. And those have those have not been coming through in recent years. So that is maybe why there's this sort of perception that it's the reform agenda is getting a little tired. Having said that, I think that, you know, part of the reason that we've got such a sort of buoyant and positive corporate mood in India at the moment and a sort of positive outlook on growth is thanks to the reforms that Modi put in place early in his, you know, his during his first term in office. And that's now providing a kind of base for growth. So, things like the goods and services tax, for example, now are helping drive tax collections in India way ahead of expectations. That, in turn gives the government more spending power and they are using that at the moment to particularly spend on infrastructure. And of course, infrastructure is critical to sort of underpinning economic growth and bringing down logistics costs and so on and providing, as I say, that kind of base for the growth. So, I think that's been important. And I think also, you know, yes, the pandemic was tough for India, as you said, particularly in the early phases. But again, in contrast to the west, we saw India maintain monetary and fiscal discipline through the pandemic, in contrast to much of the west. And so, we haven't now seen the high levels of inflation that we are seeing elsewhere in the world. And that's meant that India has not had to raise rates aggressively. And again, that provides a sort of more conducive backdrop for economic growth.

Nick: Yeah, it's interesting you mentioned that about the monetary and fiscal discipline. I think that's a pretty strong story around all emerging markets at the moment. In terms of emerging markets now being able to lower rates and fiscal balances are in a much more healthy position versus developed markets. Yeah, maybe if we could just broaden out a little bit. As I mentioned in the outset, it's been really striking the divergence between India and China in the last couple of years. And certainly, yeah, what you're saying about the tone you're getting from corporates is quite different from some of the tone we're getting from Chinese corporates and certainly investor perception of China is pretty poor at the moment. Yeah, why do you think there's been this big divergence? What's your what's your take on that?

James: Yeah, I mean that really is a very striking contrast at the moment and in many senses, I think kind of China and India are the mirror image of one another. So, if you think about China's issues and woes at the moment, it's a combination of slowing growth, a beleaguered property sector, weak consumer sentiment, and a reluctance really by the government to press on the pedal of kind of infrastructure spending and more debt to kind of stimulate the economy as they have done so many times in the past, given concerns about high debt levels. In contrast, India, you know, you've got accelerating growth and the last quarter's GDP came in ahead of estimates and that's driving upgrades to GDP forecasts. Now you've got a booming property sector, particularly in the kind of residential property segment at the moment. The consumer sentiment is healthy, particularly in the kind of urban and metro areas, maybe a little less so in the sort of rural economy, but very strong in urban areas. And as I've said, you've got this accelerating kind of public sector spend on infrastructure. So, it is the contrasting view. The only other point I would make is, is the geopolitics are obviously different as well. And so, whilst China and the US have been at loggerheads for some years now, the US, I think in a classic kind of balance of power game, is looking to India as a as a sort of balancing force against China. And so has been kind of cozying up to, to India.

Nick: Yeah, and on the geopolitics, I suppose, you know, one of the impacts of the changing or the geopolitics dynamic between the US and China has been these changing supply chain dynamics that we've talked a bit about in the past on this podcast, like nearshoring and friendshoring. Has that had much impact on India?

James: Yes, it has. I mean, I would say it's still at a more nascent stage perhaps. So, I mean, as I said, the US and the west more generally have been trying to kind of cozy up to India as a sort of counterweight to China geopolitically that has naturally led to a pickup in foreign direct investment flows. This sort of theme around supply chain diversification and a desire by multinational companies to reduce saw diversify the risk that they've historically had on China by finding alternative manufacturing centers. So, India is, has been one of the beneficiaries of that and has been actively chasing that opportunity. They've implemented something called the Production-Linked Incentive Scheme, and that's achieved quite a bit of success. So, this is providing kind of tax breaks and subsidies and so on to attract multinationals to India to manufacture. And they've had success, particularly in the smartphone sector. So, the Apple supply chain has to a large extent replicated what they had in China, in India as well now. And they're trying to do similar sorts of things in other sectors. And anecdotally, we're also seeing multinational companies now increasingly set up what are called global capability centers in India and moving a lot of their kind of back-office functions to India to take advantage of the highly skilled but comparatively cheaper labor in India, all of which is helping support job creation and manufacturing in India, which is which is a big positive as there are given the young demographic. There's an awful lot of jobs that need to be created over the coming years. And manufacturing historically has not been a great strength of India's.

Nick: Yeah, that's great. I think we're all familiar with Indian call centers and how well they work. I suppose one part of the CapEx story at least in China that still remains really exciting is the green economy and renewables and China's position in the value chain for various parts of those kind of transition type companies. Yeah, how investable is that theme in India?

James: So, there's a lot going on in India within sort of green economy and renewables at the moment. We saw at the COP26 in Glasgow, India make a kind of surprise commitment to be net zero by 2070. And I say a surprise because India obviously is a large developing economy and one that's historically and currently is still heavily reliant on thermal power. So, it's got an awful lot of work to do to achieve that. But already they've set some nearer term targets around the extent of renewable energy generation that they want to have in place by 2030. And that in turn means that India is now got one of the largest renewable energy expansion plans in the world. They're also now, I think, the third largest market globally for solar photovoltaic capacity. So, this is an exciting area. There's a lot of growth there. I think the challenge for public market, investors such as ourselves, is finding ways of playing that through the listed market. There's not an awful lot of companies that are listed in India that are sort of direct play on this. Having said that, within our portfolios we have one solar and wind plant operator and then we're also looking at this sort of indirectly. So, we have a number of industrial sort of capital goods companies that are manufacturing components and equipment that feed into this theme. And another company that's providing kind of connectivity in terms of electricity transmission networks and so on into renewable plants. So yes, it should be an interesting opportunity for several years to come still.

Nick: Are you seeing more companies come to market in that sector in terms of the IPO pipeline? Do you think it's going to be something that, you know is bigger in the near future in terms of an investable opportunity?

James: So, we are I think there's kind of two areas where we've seen a lot of IPO activity over the last couple of years. One is in kind of the internet space, the digital space. And my prediction is that the India market is going to be, the India stock market is going to be transformed over the next decade away from being a kind of fairly traditional industrial and sort of banks led market to something much more dynamic and growth focused with many of these digital companies growing very rapidly. So that's one. And the other is this kind of green theme. And we're seeing that in all sorts of different ways. I mean, there have been companies that are direct place like the sort of solar plant operators, but a number of kind of industrial companies coming to market that are playing in that value chain, playing in that supply chain, whether it's in providing green chemicals or clean energy kind of gases, these sorts of things. So yes, there's definitely quite a bit of activity there.

Nick: If we turn it on its head a little bit and think about the risks that are specific to India, is there anything out there that you think you could or is there anything out there that you think potentially could derail this story in the future?

James: I mean, there's always, always risks, of course. And we have the country going to a general election. So whilst it's very much the base case that Modi will win a third term and there will be continuity, never say never in the world of politics, and in the event that Modi weren't to win a third term or were to lose a majority and have to sort of form a more complex coalition than then, I suspect we would see the strong infrastructure spending that's been happening the last few years start to moderate and taper off. So that's definitely a risk. I think you know, India is a net importer of oil. And so, with oil elevated levels, that has to be a concern from a sort of macroeconomic stability standpoint for the current account deficit for the currency. I would say so far India has managed that very well. And it's not you know, we have seen continued depreciation in the Indian rupee, but it's been perhaps more measured than one might have expected, given the volatility in the oil price. Geopolitically, you always have to be alive to what's happening in Pakistan and the history there. And I think the final piece of the risk equation is to just be alive to the fact that the US may very well be heading into a recession, and we can debate whether that's a hard landing or a soft landing or whatever. But that will weigh on certain important sectors within the Indian market, in particular, India has a very large I.T. services sector that has the large majority of its revenues generated in the US. So, you could see a slowdown there.

Nick: Right, and I do understand those companies are finding it a little bit more challenging at the moment in that IT services space.

James: Yes, that's true. So inevitably, I think given recessionary fears and concerns in the US, we're seeing large US companies, particularly in the banking and financial services sector, cut back on their I.T. spending or, you know, reallocating that spending perhaps is closer to the truth a way from more kind of growth-oriented projects to things focused on kind of cost reduction and efficiencies. So that has been a headwind for the I.T. services players in India.

Nick: Yeah, thanks. And then I suppose, one other risk I suppose we should probably address as investors in companies in India is the valuation issue. Stocks do seem pretty expensive, and I suppose history might suggest that it's quite tough to make money from buying stocks at those kind of high valuations. What would you say to that?

James: Yes, India is an expensive market. I would say it's always been expensive. It's consistently traded at a premium to the rest of Asia and therefore to much of the rest of the world. But that's because it is still, as we discussed, an emerging young developing economy with a huge population and a very strong long-term growth story. So, in a sense of sort of paying today for that long term growth and necessarily that means that you have to yourself take a long term view I think. If we look at valuations today, it's also true that they are trading above kind of historical levels. So, it's even more expensive than it has been given the better performance that the India markets delivered in recent years. I think we're seeing that is most acute in the small and mid-cap part of the market, which has seen a particularly strong rally this year and is less of a concern in the large cap segments of the market. But ultimately, it's you know, it's true, there's not a lot of value in India. I guess you're investing for growth and valuation always needs to be looked at alongside growth, of course. And then you come to a judgment as to how much you're prepared to pay for that growth. And you have to be selective. And it's becoming harder to navigate that in the current market.

Nick: Yeah. So, I suppose, you know, putting that all together, you know, perhaps you could summarize where you've landed in terms of what you think the best opportunities in India are for 2024?

James: So, I think despite the valuations, there are still a number of attractive sectors. If we take a sort of sector lens to this to be investing in, and this is how we're positioned in our India portfolios currently. So, we continue to like the banking sector. You know, you can look at it as a kind of proxy for the macroeconomic story that we've talked about. But there's definitely a sense that we're at the earliest stages of a new credit cycle with loan growth accelerating and being sustained at quite attractive levels at the moment and our sense is that that's not fully priced into valuations at the moment. So that would be one. We've talked already a lot about the infrastructure theme in India at the moment. So, companies that are a play on that I think are seeing very robust order inflow and revenues. And so, we have a number of stocks in the portfolio that are either doing sort of engineering and construction services or they may be providing cement into all the road and airport projects and so on or other kind of equipment and services. So that's a that's a big area of interest. I talked about the property sector booming in India at the moment, particularly on the residential side. So, we've got a couple of residential property developers in the portfolio that they've been delivering phenomenal pre-sales growth north of 100%, in fact on a year-on-year basis in recent quarters. So that's a third area. And I would say fourthly and lastly, perhaps this is a very much a structural long-term story for India. But anything that's kind of domestic consumption focused and is a play on the demographics, on the rising wealth levels and in particular, I think aspirational consumption and premiumization in India is a pretty good place to be going.

Nick: Well, thanks for summarizing all that and thanks for thanks for all the thoughts it's been really fascinating. Perhaps we could finish with a bit of a fun question in I know you are in Mumbai, in Delhi, on your latest trip, but I'm sure you've been to plenty of places in India. Perhaps you could tell us what your favorite places in in India. And where you would like to go back to for a holiday?

James: I mean, there's so many amazing places in India. And part of the, part of the joy of traveling around India, I think, is just the huge diversity that is on offer there. But, you know, I think if I was to pick one place that I've been to and would love to return, I think it would be the Himalayas. I've been to an area in the sort of far northeast of India called Sikkim, which is up in the up in the Himalayas and is stunningly beautiful and would happily go back there. But I think on my list next would be Ladakh on the sort of other side of the country, but also up in the Himalayas. So that's next on my list.

Nick: Well, that sounds great. And I think I'll add them on my list as well. So, thanks for those. Well, I think that's a good place to draw the podcast to a close. So, thanks very much James for joining.

James: That's been great. Thank you very much, Nick,

Nick: And thanks everyone who took the time today to listen in. If you enjoyed today, then please download our other podcasts from our website or wherever you normally get your podcasts. Watch out for the next episode and tune in.