Investment: India picks up the pace despite Games snags

Published on Friday 8 October 2010 19:55

India picks up the pace despite Games snags

• Shortcomings in India's preparations for the Commonwealth Games should not be taken for signs of wider weakness Picture: Getty

INDIA'S staging of the Commonwealth Games came in for heavy criticism but the rapidly growing country continues to present a golden opportunity for investors, experts believe.

India's "coming-out party" as a global player was undermined by a raft of problems with venues, logistics and security that cast doubt on its ability to deliver. But it will take far more than that to derail the economic growth of the world's largest democracy.

India's population has grown to more than 1 billion and it is estimated that there will be 70 cities with more than a million residents by 2026. Its economic growth is forecast to hit 9.4 per cent this year, second only to China - the country with which India is most commonly bracketed and compared. And it is alongside China and Brazil that India is viewed by many investors as the great emerging markets opportunity.

Charlie Nicholls, managing partner at investment-advice-online.com, said India, like China, is set for huge economic growth with potential to become one of the world's super-economies generating high investment returns.

"China used the Olympics as a platform to generate business partnerships and commercial awareness very successfully and India is adopting a similar strategy, by using the Commonwealth Games for exposure and to encourage foreign investment," said Nicholls. "Even if this is not a success, India has such a huge population and fast growing economy it is still a very good investment opportunity."

But it's dangerous to view India in the same context as China, given some significant differences in the way in which their economies are growing. For instance, China's import and consumer-led economy contrasts with the high level of exporting in India, particularly commodities such as food and minerals.

However India and China do share similar investment themes, including massive infrastructure development to accommodate rapidly growing - and moving - populations. Railways, roads and train projects are currently being rolled out all over India, which already boasts the third largest airport in the world in the form of the new Delhi International.

India's growth, like China's, is being driven largely by domestic demand from an increasingly affluent population spending its growing discretionary income on everything from white goods to financial services.

Household consumption accounts for 57 per cent of the economy, similar to Germany and Australia and well ahead of China's 36 per cent, noted Adrian Lowcock, senior investment adviser at Bestinvest.

He said: "With almost a third of the population under 15, it has a young and growing workforce, which is skilled and well educated.This young population will drive consumption and fuel future domestic demand."

But there are lingering concerns that economic growth does not necessarily translate into investment returns. Inflation at more than 8 per cent and interest rates of 6 per cent can affect currency values, which are very influential for overseas investors. The doubters also point to India's budget deficit, which at 4.5 per cent is high for an emerging market.

But Lowcock said: "The government is committed to reducing this deficit, both to improve the country's financial stability and attractions as an area for investment. Corporate governance standards have already been improved to help attract foreign capital, and are now comparable to that among companies in the west."

The easiest way to invest in the Indian economy is through collective funds such as unit trusts and investment companies. India-focused funds currently invest large proportions of their assets in telecoms, real estate and industrials companies, all of which have performed strongly over the last year, according to Tom Munro, director of IFA Tom Munro Financial Solutions. Financial and energy firms are less prominent, however, following under-performance in recent months.

Fund returns have ranged from 24 to 35 per cent over the last year, with the First State Indian fund on top. However, there are few exclusively Indian funds available at present. Nicholls recommended the India funds offered by First State and Neptune, while Lowcock likes the Aberdeen Global Indian Equities fund, which invests both in India-based companies and those with significant business activities in the country.

It's easier and less risky to gain exposure to India through broader funds, most notably Asia or Far Eastern vehicles and emerging markets funds. Funds such as Invesco Perpetual Asia have a percentage of their fund invested into India, with similar or bigger allocations in countries including China and Brazil. Then there are the Bric funds, investing in Brazil, Russia, India and China, and the growing emerging markets sector, where funds have a lower exposure to India and greater diversity across sectors and regions.

Munro picked out the First State Global Emerging markets, Dimensional Emerging Markets and Aberdeen Emerging Markets, all of which are top quartile returning an average of around 45 per cent over three years. Exchange traded funds (ETFs) - listed vehicles that seek to replicate the price and yield of a specific index or sector - offer a cheaper alternative to traditional investment funds. For most investors the issue now is not whether they should have some exposure to India, but how much.

Munro said: "Investing in India can in some instances resemble a tightrope walk. However, a small exposure to the region of, say, 2 to 3 per cent of a well-balanced portfolio can pay dividends over the longer-term. Returns can be volatile so I would caution against over-exposure."