Sheryl Sutherland says investors need to consider India in a properly diversified portfolio. She outlines the inevitable risks, and also notes some opportunities

By Sheryl Sutherland*

“Whatever makes you uncomfortable is your biggest opportunity for growth.”

~ Bryant McGill

I have been talking to investors about India for quite a few years now – not as a great travel destination, but an interesting investment destination, for a diversified portfolio of course.

The IMF thinks so also, raising their forecast saying that the country’s growth will remain strong in 2023 and 2024, with growth at 6.3% expected. The growth is attributed to increased consumption, infrastructure spending and new business technological development. There are headwinds to be navigated (as always) which could be escalated due to resurging inflation and geopolitical tensions.

India has witnessed the greatest shift in GDP growth since liberation in the 1990’s. Today it is one of the fastest growing economies in the world with this trend likely to continue. India’s demographics drive this tailwind, with the dependency ratio (those under 15 or over 65 divided by people of working age) continuing to fall, currently 48%, leaded towards levels similar to China which bottomed at 30% in 2019.

Consumer trends led by a fast-expanding middle class is one of the biggest drivers of the economy in the world’s most populous nation.

The optimism in India’s growth story is partly because more Indians are choosing to work or set up businesses in the country rather than moving to the Western world. India has averaged 6.0% GDP since the liberation of the economy and the significant reforms undertaken in 1991. Over the last decade, despite COVID, growth remained at 5.5%. In the year ending FY23 India recently announced GDP growth of 7.2% (ahead of China’s 5.2%).

Another point of interest which is rarely acknowledged, is the diversity the region brings to an investment portfolio. The Indian share market has a low correlation to world share markets at 0.47. Added to this India is moving away from a decade of weak profit growth (FY11 – FY20) due to low private investment, an undercapitalised banking system and high cost of capital.

Economic recovery, improving governance, reforms and a focus on infrastructure is likely to assist profit growth for Indian companies in areas such as technology, health care and government privatisation. The pre-election environment is conducive to growth.

Temper your likely portfolio exposure with the expectation of headwinds. I mentioned among them the following; the widening current account deficit, the possibility of surging inflation, heightened geopolitical tensions, and India’s loose monetary policy. Extreme weather events such as droughts in southern India had an adverse effect on agriculture and rural recovery. Geopolitical tensions, which caused oil prices to spike will affect the Indian economy with more than 80% of its oil consumption imported. There is a considerable reliance on foreign direct investment to create more manufacturing jobs.

The fall in global growth to an expected 3% this year, and 2.9% in 2024 could also drag the Indian economy down.

Still India is the leader of the pack across the larger emerging market economies over the last three years and head-to-head with Taiwan over last to twenty years. For example, Indian stocks such as Bajaj Finance (Non-Bank Lender), Axis Bank (Private Bank), ICICI Bank (Private Bank), Infosys (IT Outsourcing), Cipla (Pharmaceuticals), HDFC Bank (Private Bank), Hero MotoCorp (Automobiles), HCL Technologies (IT Outsourcing), Aurobindo (Pharma Pharmaceuticals), Tata Motors (Automobiles) may fit the bill.

*Sheryl Sutherland is director of The Financial Strategies Group, and author of Girls Just Want to Have Fund$ – Every Women’s Guide to Financial Independence, Money, Money, Money Ain’t it Funny – How to Wire your Brain for Wealth, and co-author of Smart Money – How to structure your New Zealand business or investments and pay less tax. You can contact her here.