From Our Briefings Newsletter
The article below is from our BRIEFINGS newsletter of 20 February 2018:
Briefly . . . on Investing in India: A Study in Contrasts
For investors, India's biggest challenges are also its biggest opportunities. Earlier this month, Goldman Sachs Asset Management (GSAM) took a group of 21 institutional investors to India to meet with policymakers and corporate leaders across New Delhi, Mumbai and Bengaluru. Katie Koch, global head of client portfolio management and business strategy for GSAM Fundamental Equity, shared highlights from the trip.
Katie, you just got back from GSAM's annual investor trip, highlighting India's investment opportunities, improving policy and economic climate. Why India?
Katie Koch: We have a bullish outlook for emerging markets more broadly, but India really stands out. For one, we've had a long-standing presence in India -- it is a country where favorable demographics are driving economic growth. The domestic consumer stands at an incredible inflection point as we expect GDP per capita to double in less than 10 years. While the country took a short-term economic hit from demonetization and GST in 2016, the country and companies are now transitioning to a phase where the economy can reap the gains of structural reforms.
The country itself is really a study of contrasts. More than 1,600 languages are spoken across 29 states and the country necessitates a differentiated, rather than a Pan-India, approach to serve its diverse needs and people. To that point, India is concurrently running projects to build both physical and digital infrastructure, to better enable the travel of goods, information, and the population of 1.2 billion people. At the same time, the public sector is working to smooth the friction points to allow for a greater ease of doing business and living. This transformation is already under way, which we saw first-hand, after meeting with the several key policymakers, including the country's Finance Minister, Railway Minister and the Transport Minister. Our clients were incredibly encouraged by the vision and execution of Modi's government and we are focused on the extent with which this positive momentum can continue as Modi's BJP party faces central elections in 2019 and numerous state elections this year.
Where is India in the midst of its political and economic reforms?
KK: We think India is just getting started. The country itself is on the precipice of a multi-year expansion, fueled by earnings recovering to its mid-teens historical average. From a macro perspective, India today is in the same position China was in 2000 with similar GDP per capita profiles and nearly identical share of total global output, although India lags China by internet penetration and online consumption. India is also young in its investment cycle and also in its demographic profile. More than 65 percent of India's population is under the age of 35. And despite contributing only 3 percent of global GDP, India holds 18 percent of the world's working population. We continue to see great potential for India, with opportunities to generate strong return on equity, particularly in sectors where India is trying to solve domestic challenges, like employment, education and healthcare for the 150 million of new workers that will come into the economy in the next 10 years.
From an investment perspective, our view on India is set within an optimistic framework for emerging markets equities more broadly, providing double the earnings growth at a 25-30% discount to US equity markets. India's market structure is particularly compelling due to the number and diversity of publicly listed companies that offer access to India's growing consumer, while having a much smaller share of state-owned enterprises than China, for example. We prefer small and midcaps, where 30% exist outside of the benchmark index, and we have been able to generate outperformance with our bottom-up expertise on the ground in India.
What trends are you observing in India that may set the tone for more global consumption patterns and innovation ahead?
KK: India is becoming increasingly relevant in the global economy and, in many cases, shaping the way we consume and innovate globally. Without any incumbent technological systems in place, India has been able to innovate and garner faster uptake than many of their developed market counterparts. Development of mobile payment solutions -- which got a boost by demonetization policies in India in 2016 -- is projected to grow from 2.9 billion transactions last year to 450 billion in the next 5 years, or a $4 trillion opportunity, according to GSAM estimates. Healthcare represents another opportunity. More than one out of three pills consumed in the US is manufactured by an Indian company, for example, but the challenge -- and opportunity -- ahead is providing greater healthcare domestically to India's growing population.