India: Still the jewel in the EM crown?
The India growth story is now well-established, but on the eve of the largest general election in the world, should it still be regarded as the jewel in the emerging market crown?
There are certainly numerous reasons to be positive about India – a young population; a growing, educated middle class and a huge consumer market. But since Prime Minister Narendra Modi’s arrival in May 2014, the India weighting in some indices has grown a lot less than we might have expected. We have to ask if the initial expectations around Modi magic is fading.
At this stage, China is becoming a greater component of emerging market indices compared to India, and eventually, its dominance may warrant reconsideration in terms of its ‘emerging’ status. Of course, China is not without its problems, but, unlike India, it benefits from more ‘coordinated’, government-led, growth initiatives, with the intention of moving from infrastructure-led growth to one steered by the aspiring middle class consumer.
Developing market country funds can harbour the potential for high returns, but by their very nature, they are high risk funds. As an investor, you are taking on a lot of country-specific risk, sometimes in regions prone to social, economic, and political upheavals. It’s important to remember this, as these funds are not for the faint-hearted. There are some very good active India funds out there; as India is a difficult market to get to know well and one that can suffer swings in liquidity, we like managers that have a genuine edge when it comes to local knowledge. But the risk is that the ‘India story’, which many might feel is now well-established, could lull investors into a false sense of security, that somehow India is immune to instability. Yes there might be some buffer, but the legacy risks associated with developing economies remain.
So while PM Modi’s re-election might bring a degree of constancy, investors should be prepared for bouts of volatility in the Indian market over the next few months. But for investors who have a lot of conviction and patience in India’s progress, that same volatility could mark an attractive entry point into the market.
Exposure can also be gained via a more diversified Asia or emerging market fund.
Head of Collectives Research
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