Unleash the Potential of India

Author: James Thom, Investment Director, Asian Equities, abrdn

Investors in India enjoy a favorable situation, ranging from economic resurgence to a favorable geopolitical environment. What does this mean in practice?

Investing in emerging markets has always been a balancing act. The promise of great growth potential is often tempered by the volatility and uncertainty inherent in these markets.

One of the countries that has recently performed best is India. In this article, we will analyze the opportunities and risks associated with this market and answer whether it remains an attractive place to invest in 2024.

India's Economic Resurgence

India's business landscape tends to operate with the glass half full. However, the current optimism of companies is not unjustified and contrasts greatly with the sentiment prevailing around the world. This is largely due to the fact that in the years prior to the pandemic, the country faced a period of below-normal growth, a situation that was reversed just as the pandemic occurred. The Indian economy seems to be regaining lost ground, driven by the reopening of its economy and the reduction of political risks. As a result, growth acceleration is occurring strongly.

Political Stability and Reform Initiatives

Growth has been backed by the political stability offered and the economic reforms introduced by Prime Minister Narendra Modi, who is seeking a third term. While the early years of Modi's administration were characterized by the implementation of radical reforms, more gradual changes have occurred in recent years. However, the foundations laid by these early reforms continue to underpin India's current positive economic trajectory. An example was the Goods and Services Tax, which boosted tax revenues. Currently, these reforms are being leveraged to finance essential infrastructure projects, which are crucial to laying a solid foundation for sustainable growth.

Opposite Fortunes: India versus China

The reforms have also generated strong returns in the Indian stock market, especially compared to China, its regional counterpart. China is facing a slowdown in growth, a besieged real estate sector, a weakening of consumer confidence, and caution in infrastructure spending due to concern over high debt levels. On the contrary, India is experiencing a boom in the real estate sector, high consumer confidence among the growing middle class and in urban areas (rural spending remains weak). We are also witnessing a rise in infrastructure investment.

Geopolitical factors exacerbate these differences. In this regard, the United States maintains an active relationship with India as a counterweight to China. This strategic alignment has increased foreign direct investment flows to India, especially as global companies try to diversify their manufacturing centers. Evidence of this has been the creation of global capacity centers, where multinational companies move their administrative functions to take advantage of India's skilled and cost-effective labor. The country has encouraged this activity with initiatives such as the Production Incentive Plan. This system offers tax exemptions and grants and has successfully attracted investment, especially in sectors such as smartphone manufacturing. Much of this activity has occurred at the expense of China, or at least new investments in which China loses out. This divergence in fortune underscores the significant disparities between both economies, which have translated into the performance of equity markets.

Green Economy and Renewable Energies

India is taking significant steps in the green economy and renewable energy sector. At the COP26 summit, its leaders committed to achieving net zero emissions by 2070, an ambitious goal for a developing economy. To meet this goal, India has set intermediate renewable energy generation targets for 2030, positioning itself as a major player in the expansion of renewable energies.

Although the green economy presents promising opportunities, navigating India's public markets for direct investments can be tricky. Few listed companies directly fit this theme. However, investors can explore opportunities indirectly through industrial companies that supply components and services to the renewable energy sector.

Risks to Consider

Investing in India is an activity that is not without risks. The upcoming general elections, the country's status as a net oil importer, and the geopolitical tensions with its neighbor, Pakistan, are just three issues that could affect the country's growth trajectory and political stability.

The Indian stock market has historically traded at a premium compared to other emerging markets. However, current valuations are high, even in relative terms, especially in small and medium-sized companies. Their growth potential is undoubtedly the reason why investors are willing to pay a premium in this market. However, it is necessary to analyze to what extent an investor is willing to pay for that growth.

A multifaceted investment opportunity

Despite its high valuations, India offers a range of attractive sectors for investors. The banking sector, companies related to infrastructure, residential development, and businesses focused on domestic consumption present opportunities in this dynamic market. As with any investment opportunity (and particularly in emerging markets), caution is required. However, with a selective approach and a long-term mindset, investors have a range of opportunities to take advantage of its growth story.