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Asset AllocationAugust 1, 2023

India Shines as Investment Draw, at China’s Expense

The world’s most populous nation is enjoying a stock market surge and appears poised for further investment.

Art by Klaus Kremmerz

India has become a desirable investment target in recent years, as it has upgraded its infrastructure and developed a more business-friendly attitude. At the moment, it constitutes a small percentage of asset allocators’ portfolios, but that portion shows signs of expanding.

Much of this has to do with the dimming appeal of China as a place to find returns. “Our clients are excited about India,” says HK Gupta, a portfolio manager at Sustainable Growth Advisers in Stamford, Connecticut, which manages assets for institutions. “China is slowing. It’s less attractive.”

The Chinese economy and stock market are downshifting, owing to China’s harsh pandemic lockdown slamming productivity, its ballooning debt, aging population and hardline foreign policy—fears of China invading Taiwan are a nightmare for the U.S. and other trading partners.

Chinese gross domestic product, which once clocked double-digit annual advances, now grows at a mid-single-digit rate. China’s stock prices are lower than they were in 2007, and earnings per share are the same as in 2013.

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India, on the other hand, is on the upswing. Its stock market is burgeoning and just became the world’s fourth most valuable, moving past the United Kingdom (China is second, Japan third). The yearly GDP growth rate is expected to be twice that of China over the next decade. The International Monetary Fund projects that the Indian economy will outpace the rest of the world this year, growing at a 6.1% pace and projected for 6.8% in 2024. (China: 5.2% and 4.5%; the U.S: 1.4% and 1.0%.)

Aiding India’s advance is its emergence as a technology hub, as seen in Apple’s intention to shift some iPhone production to India from China. Recently, India launched a spacecraft aiming to land a rover on the moon.

India’s population is the world’s biggest, at 1.4 billion, edging past China’s, per the United Nations. The median age in India is 29, one of the youngest globally (China: 38). “They have a young, dynamic population in India,” says Cameron Brandt, director of research at EPFR, a data firm. “India has all the ingredients for investors.” Thus far this year, S&P’s BSE Sensex index of Indian stocks is up 8.7%, versus the Shanghai Composite’s 6.1%, as of July 28.

Fertile Investing Ground

Investors with a taste for emerging markets have done well by India. The iShares MSCI Emerging Markets exchange-traded fund advanced 0.5% annually over the past five years and 2.4% over 20. Its India counterpart was up 6.7% and 7.8%, respectively. Among emerging markets in MSCI’s index for the sector, India’s weighting ranks third behind No. 1 China and No. 2 Taiwan. India’s stocks have done better than China’s over both five and 10 years.

Foreign direct investment into India has expanded more than 23-fold this century and in 2022 reached its highest level ever, $83 billion,^,the Indian Ministry of Commerce and Industry reported. The number for 2023 is estimated to be even larger: $100 billion. U.S. fund flows into Indian stocks have had their ups and downs by EPFR’s measure, although the trend is upward. They peaked last year at $24.2 billion after turning negative in the pandemic-onset year of 2020.

After gaining independence from Britain in 1947, the Indian economy was heavily and stultifyingly controlled by the government, which imposed regulations and tariffs to keep out Western capital. Since the 1990s, though, successive political leaders have gradually made India more welcoming to private enterprise—and outside investment.

Since taking office in 2014, Indian Prime Minister Narendra Modi has regularly reached out to foreigners to invest in his country. The Modi government has worked to improve its red-tape snags and has bettered its position on the World Bank’s ease of doing business scale. Of the 190 nations surveyed, India rose from 130th in 2016 to 63rd in 2019, the last year measured.

Allocators Enticed

Canadian public pension funds have a long-standing interest in overseas investments, and India is looming ever larger in their sights. “We are encouraged by the environment created to attract foreign direct investment.,” said John Graham, CEO of the largest Canadian fund, the Canada Pension Plan Investment Board, in a statement. “We are interested in the Indian economy whose breadth is encouraging.”

CPPIB (assets: $432 billion) opened an investment office in Mumbai, India, in 2015, its second one in Asia; the other Asian locale is in Hong Kong. Overall, the plan has $21 billion invested in the Indian economy, said Sujeet Govindaraju, head of CPPIB’s India office, in an interview with an in-house publication.  That represents 4.8% of its portfolio.

The fund has a stake worth $2.4 billion in India’s Kotak Mahindra Bank and also has invested in many real estate ventures, often via alliances with Indian partners, such as its deal with Larsen & Toubro, the country’s top engineering and construction company. Building out Indian infrastructure is a major thrust of Modi’s administration. Among CPPIB’s other ventures is to invest $205 million in warehouse and industrial parks developer IndoSpace.

Among U.S. pension programs, the California State Teachers’ Retirement System ($315 billion) has one of the most robust investment presences in India, with $1.6 billion invested. That amounts to a much smaller segment of its assets, 0.5%, than the CPPIB is investing in India. CalSTRS’s largest investment there is $37 million in Yes Bank, which has staged a comeback from its troubled past, when it had difficulty raising capital. CalSTRS declined to comment on its plans for India

Investment Destinations

What are the best investments to focus on in India? Opinions vary, of course, but a clear favorite is tech.

Although poverty still is widespread on the subcontinent, the government has successfully digitized the nation: People from all social strata can makes cashless transactions over their phones more easily than in the U.S. “India has leveraged the internet to create a plethora of digital public goods and government services,” an E&Y study from earlier this year found. “This has allowed India to connect numerous citizens and provide a more democratic and an inclusive digital network.”

The nation has a deserved reputation for technology-centered education and for its skilled, English-speaking workforce. Small wonder that the CEOs of two U.S. tech giants, Google-owner Alphabet and Microsoft, Sundar Pichai and Satya Nadella, respectively, were born in India.

Early-stage venture capital is a good avenue through which investors can access the Indian tech scene, according to Kia Ghorashi, managing director at Silicon Valley’s Makena Capital Management. His prime example is Flipcart, an e-commerce company founded in 2007 with VC funding. Walmart bought a controlling interest in the outfit in 2018 for $16 billion, valuing the company at around $20 billion. Flipcart is expected to go public this year, now valued at around $40 billion.

At the same time, Ghorashi cautions, there is “less [of a] cycle of liquidity” in India, which makes finding buyers of VC-backed companies more difficult than in the West. “Exits are harder” to do, he says. Another problem is intellectual property protection, which is not as strong in India as elsewhere.

Helping underwrite the tech industry and other progress is the growing Indian financial sector, which many foreign investors favor. Stock in HDFC Bank, which deals with large borrowers, and Bajaj Finance, lender to smaller enterprises, are at the top of many buy lists.

Infrastructure is another good area for investors, says Hiren Dasani, co-head of emerging markets at Goldman Sachs Asset Management. Under the Modi regime, the government has spent billions to transform a mostly rural country, with poor roads and bridges, into a place easier to traverse.

Highways now crisscross the landscape. Driving time between Delhi and Mumbai will be cut in half, Dasani says, to 12 hours from 24, when the Delhi Mumbai Expressway project is completed in 2024. Once, there was only one east-west rail line, which freight and passenger trains both used, making for frequent delays. Now separate freight and passenger lines exist, he notes.

Undergirding all these promising developments is India’s young population: It has one of the world’s best ratios between the working-age cohort and the number of children and elderly. That stands to power GDP exponentially higher, as a Goldman Sachs study forecasts that, by 2070, India will have the world’s second largest economy, behind China and slightly ahead of the U.S.

Should such a bright future come to pass for India, there’s an argument that investing in the country today might make a lot of sense.

Opinion: What Do Marriages and M&As have in Common?

Whether it's a personal or business merger, a lasting and beneficial relationship depends on planning for life after the ceremony.

By Kevin Gallagher and Jeff Stakel

From left: Kevin Gallagher; Jeff Stakel.

A successful relationship, whether personal or business, depends on many factors. While there naturally must be initial attraction, shared interests or simply an enjoyment of being together, a lasting and meaningful partnership is ultimately driven by an alignment on long-term goals and an agreement on how to achieve them.

Consider, for example, the elements of a successful marriage and how they mirror a traditional business merger. You enter a marriage aligned on your long-term lives together: on how you will interact, on your shared goals and dreams and on how you will achieve them. You look beyond what you both bring to the relationship as individuals, focusing instead on how to build a successful future together. Perhaps most importantly, you recognize that walking down the aisle, the official “close” of the transaction, is just the start; the greater challenge comes in successfully integrating your lives.

This may seem to be common sense. Why, then, do asset management firms focus so much time on assessing the target at the outset but neglect the need to take a realistic, honest and holistic view of how the combined entity will operate and, in turn, establish and implement a comprehensive plan to achieve long-term success?

This is especially important in the current environment. Following an active year for investment manager M&A transactions, deal activity slowed, but secular trends—including slow growth, uncertainty around the capital markets and rising costs—all suggest that consolidation will continue. Yet such problems make it all the more essential for merging entities to have a strong rationale and solid go-forward plans prior to embarking on a match-up.

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Yes, mergers may be aimed at securing immediate growth or value accretion. Nonetheless, while the relationship may start strong—through synergies, stock price increases or even the calming of markets—they often fall apart or fail to achieve their true potential due to limited energy being spent on understanding what will be needed to make the post-close entity as strong as possible. The businesses are overlooking what we believe to be the most important factor of a successful M&A: a successful integration.

The Long-Term Value of Integration

Effective integration is not easy. It requires a clear vision for the combined entities—along with time, commitment, energy and resources—just like a successful marriage. But its positive impact is clearly evident.

Asset management firms that approach integration with vision and commitment have historically experienced better economic outcomes. For example, more integrated firms enjoy higher margins and have experienced faster growth than less integrated peers.

M&A deals can fail to meet their promise—or even entirely collapse—when integration is undervalued or outright ignored. Common missteps often made along the way include:

A lack of appreciation for cultural differences between firms and the neglect of the change-management efforts necessary to align disparate cultures;
Attempting to put both management teams on “equal footing,” resulting in a division or duplication of leadership, inconsistent messaging and hindered decisionmaking;
General poor business performance post-announcement due to the merging parties not aligning on how the organizations should build on each other;
An unclear narrative of the goals and values of the combined company, leading to confusion in the marketplace and a lack of clear benefit to clients, which in turn can result in outflows;
Overoptimistic assumptions about economies of scale, overlooking the investment and time required to unify technology systems and create a shared operating platform for both businesses;
Sudden changes in personnel covering key clients and intermediaries, which can disrupt relationships even when service has been upgraded in other ways; and
Poor alignment at lower levels of the organization: While senior business and functional leaders may understand the rationale of the merger and will be compensated well if it succeeds, a lack of alignment elsewhere can create issues with morale, performance and retention at a critical time.

Moreover, these factors naturally impact the combined base of employees, who face increasing fatigue, burnout and confusion about not only their new organization, but their place within it.

Commitment to the Process

If integration is key, what can asset managers do when considering a merger or acquisition to elevate their process and maximize their chances of success? Our experience at Casey Quirk has been that asset managers and their advisory partners need to incorporate and implement six key factors that best position executives and their organizations for the future:

Define the long-term integrated vision: M&A gives executive teams the opportunity to re-examine their firm’s operating model. Integration planning based on a holistic view of how the combined company will compete can deliver operating improvements, as well as economies of scale.
Develop a structured decisionmaking process: Internal and external stakeholders need clarity. Some decisions will be known from the start; others will require time. Provide as much clarity as possible and, where needed, provide details on how decisions will be made.
Articulate the strategic narrative to the market: Asset owners and intermediaries are not blind to the dynamics facing the asset management industry. In fact, both are understanding of and patient with transactions, provided the rationale and benefits to clients are clearly and consistently communicated.
Ensure an issue-free legal Day 1 (closing): Identification of potential issues and pre-planning of responses is key. Though reaching a successful legal Day 1 will not earn executives credit, missteps will certainly create frustration, failure and fatigue for team members.
Dedicate resources and create a strong project management office: Successful integration planning and management is a full-time responsibility; trying to accomplish it off the “side of a desk” risks short-changing the integration planning process and the day-to-day management of the firm.
Mobilize teams for post-merger integration: Realizing the full value of the acquisition involves ensuring that dedicated teams are established, empowered and accountable to refine and execute the integration plans. At the same time, the organization must have realistic expectations for timing, cost and savings and commit the resources necessary to make the post-merger goals a reality.

While each of these components is vital, we believe that point No. 1—defining the long-term integrated vision—is the most critical factor for the success or failure of an asset management M&A deal. Spending the time and resources upfront to develop a detailed plan and visualize the road to success not only indicates to all involved that a firm is committed to the long-term viability of the combined entity, but it makes the latter’s components far easier to achieve.

At the end of the day, it is important to recognize that while it takes a great deal of work to bring a transaction to a close, that milestone does not mark the end of the journey. Like a successful marriage, a successful M&A transaction depends on what the parties do long after the wedding ceremony. It requires planning, trust, energy and commitment for the long term, and while it may not be as exciting as the celebration, in the end, it is far more important.

Jeff Stakel and Kevin Gallagher are both principals at Casey Quirk, a business of Deloitte Consulting.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

Tags: Mergers and Acquisitions, money managers

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