India Shines as Investment Draw, at China’s Expense

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.