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Will India be the next high-growth emerging market?
Anirudha Dutta
Economist
Brad Freer
Portfolio Manager
KEY TAKEAWAYS
  • After a slowdown in 2019 and a harsh lockdown in 2020, India may be poised to regain its place among the fastest-growing emerging markets.
  • From e-commerce to banks to real estate, we look at some of the key sectors that could drive the recovery, and where the opportunities may lie for equity investors.

When Facebook paid $5.7 billion for a 10% stake in Jio Platforms, the digital technology arm of Indian conglomerate Reliance Industries, it signalled Silicon Valley’s growing enthusiasm for India’s consumer market. Facebook’s main interest in the deal with India’s largest mobile network was to process payments for millions of local retailers via its WhatsApp messaging service, which already has more than 400 million users in India. Google soon followed, with a $4.5 billion investment in Jio. Meanwhile, Walmart spent $16 billion for a majority stake in e-commerce unicorn Flipkart, and Amazon invested around $6.5 billion to become a major player in Indian e-commerce.


These companies are hardly alone. India’s entrepreneurial culture and vast pool of technology talent has given rise to a host of domestic competitors, some with significant private equity funding. Now, as they extend their scale, many are lining up in the initial public offering queue. If successful, these deals could help support the digital ecosystem and diversify India’s equity markets. Among the most active in e-commerce are Flipkart, food delivery services Zomato and Swiggy, online insurer Policybazaar, logistics firm Delhivery, and cosmetics retailer Nykaa.


New public companies are part of the further diversification of India’s equity market away from state-owned enterprises to private-sector banks, technology companies, consumer stocks and energy businesses. Health care is a fast-growing area of the economy, dominated by manufacturers of generic drugs. A significant pool of new foreign portfolio investments is helping drive the market well above the broad emerging markets benchmark.


 

Indian stocks have outpaced emerging markets[1]


India could be poised for double-digit growth


The last decade has been challenging for India’s manufacturing, construction and infrastructure sectors as the investment cycle slowed down. That weighed on gross domestic product growth, which reached a decade-low 4.2% in 2019. Consumer demand driven by easy finance, runaway credit growth for an aspirational population, and government spending have been key supports for economic growth. So what are the prospects for India’s market and economy?


In our view, industrial firms’ aggressive cost-cutting during the past few years has laid the foundation for change. Companies have slashed capital expenditures and reduced leverage. The Indian government has implemented much needed labour reforms. Meanwhile, bank balance sheets are healthier and interest rates are low. Against this backdrop, Indian manufacturing is probably entering a multi-year growth period with recovery in margins, profits and ROCE (return on capital employed). This should drive the new investment cycle.


At the same time, the COVID-19 vaccine rollout is restoring consumer confidence. India has navigated the pandemic well despite dire forecasts. After what has been dubbed the harshest lockdown in the world, the economy has bounced back more quickly than expected.


1. Sources: MSCI, RIMES. As at 31 January 2021


Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.


Anirudha Dutta is an economist with 30 years of industry experience (as of 12/31/20). He holds a postgraduate diploma in business management from the Xavier School of Management and a bachelor’s degree with honors in metallurgical engineering from the Indian Institute of Technology, Kharagpur. 

Brad Freer is a portfolio manager with 28 years of industry experience (as of 12/31/20). He holds a bachelor’s degree in international relations from Connecticut College, as well as the Chartered Financial Analyst® designation.


 

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.