Seeking Growth Markets

2018-05-10T07:03:48+00:00 May 10th, 2018|

At Lunar Capital, we are continuously on the look-out for long-term investments that can benefit investors in our fund (and ourselves as we are also significantly invested in the fund that we manage).

Ideally, we would allocate a portion of our fund to a large growth market (country, industry or other) that we think offers good growth potential and is trading at reasonable levels.

One of the markets that we regularly look at is the Indian market.

 

India

India is the second most populous country in the world. At current population growth rates, it could overtake China by around 2024 as the most populous country in the world.

Here are some statistics about India:

Population = 1.34 billion                                             2nd Most Populous Country

Population Growth Rate = 1.2%pa

Gross Domestic Product = USD 2,611 Billion   6th Largest economy in the World

GDP Per Capita = USD 1,983                           Ranked 139th in the World

GDP Growth 2017 = 7.1%

India is a large economy, growing at a very fast rate, but by-and-large the majority of the population is still poor by global standards.

Most foreigners and business people who visit India are intrigued by the country. It has a highly developed service sector, and a workforce that is skilled and relatively cheap. It is ranked as one of the Top 10 foreign direct investment countries in the world.

Services make up approximately 54% of the Indian market, with Industry making up 29% and Agriculture 17%.

Indian Stock Market

The Bombay Stock Exchange (BSE) has a market capitalisation of approximately $2,120 billion and is the 11th largest stock market in the world. It has over 5,700 companies listed on the exchange. It is currently trading at a Price Earnings Ratio of approximately 23.

With the large number of companies listed on the BSE, it is very difficult for an outsider to successfully pick the right stocks to invest in. India also has its fair share of corruption. Government and corporate scandals are a regular feature of the market.

The current price earnings ratio on the BSE also appears expensive by historical and global standards.

Factors contributing to growth

There has been significant infrastructure spending in India, from new and improved airports and roads to power plants and hospitals. Government has also committed to obtaining 40% of energy requirements through renewables by 2030.

India also has a growing middle-class, that is skilled, ambitious and entrepreneurial. This will likely continue to propel consumer spending.

Indians are also obliged to register their identities through the Adhaar programme. This records all citizens digitally using biometric data. The benefits to financial institutions and other businesses and agencies who require proof of identity are enormous with the Adhaar initiative.

India has also become a tech start-up hub (3rd or 4th largest in the world) and some very successful start-ups like Flipkart, Ola and Snapdeal have been established in India.

Impediments to growth

All is not rosy however:

  • There is a huge infrastructure backlog. This issue is magnified given the size of the population and cities;
  • Pollution levels is some cities like Delhi are at dangerous levels;
  • Poverty is still a large feature of the country;
  • Corruption still exists in both the public and private sectors;
  • India has a grindingly slow judicial system;
  • There is always a risk of social and/or religious uprisings, especially given that 2019 will be an election year;
  • Too few contribute to the tax base, especially compared to the size of the economy; but this has been steadily increasing.

These are some of the hurdles that the country faces to potential prosperity.

How to get exposure to the Indian market?

The Indian market should however be on investor’s radar screens. The demographic changes in this market will likely be a tailwind behind this economy. Whilst corruption is rife, this appears to be reducing. The economy is also becoming more open. Government appears to be tackling the major issues, but success rates will vary.

Stock-picking in a market like India would be very difficult for outsiders. Arguably, a good strategy would be to invest via a low-cost index tracker option. Unfortunately, this is not available directly in South Africa. South African investors would need to use their foreign exchange allowance and invest directly through the Indian market or via one of the developed market exchanges (e.g. Nasdaq).

Another alternative would be through some local unit trusts that have direct or indirect exposure to the Indian market.

A regular (say monthly) investment subscription rather than a large lump sum investment is also probably a good strategy for the individual investor.

Lunar Capital Strategy

We know that many South Africans are keen to have exposure to the Indian stock market. Our approach is to try and minimise the risks to our investors, whether it is understanding the dynamics of a particular company or determining whether a particular investment is priced appropriately or not.

To date, Lunar Capital has not invested in the Indian stock market, but we do follow the market and, in all likelihood, would invest in this market at some time in the future, either directly in certain stocks or via a low-cost exchange traded fund.

At this stage, we continue to monitor the Indian market. If and when the correct opportunity presents itself, we will allocate an appropriate quantum of funds to the Indian market.