11 June 2024

India: The Case for a Dedicated Allocation

Huzaifa Husain

Huzaifa Husain

Head of India Equities

India: The Case for a Dedicated Allocation

Shareholder meetings in India are intense affairs, packed with retail investors who are passionately invested in the proceedings. One investor, in particular, has made an indelible impression on me. In my quarter-century of attending hundreds of these meetings, I have only ever known her as the “poet auditor.” An accountant, now retired, she rarely (if ever) has missed an opportunity to dig beneath the reported results of her portfolio companies. Hers is typically the first hand up and the first called on by the moderator, and she always starts by reciting a poem – which she uses to embed her questions to the company’s board.

It is hard to overstate how much I have learned from these recitations over the years, not just about the companies (the questions run very deep), but also about the people answering them. Do they answer directly? Are they haughty and short-tempered, or patient and gracious?

When considering almost any investment in India, there really is no substitute for an experienced on-the-ground presence. Finding value starts with avoiding losses, and this can be accomplished by being especially attuned to the character and motivations of a company’s decision makers.

The Indian market’s ascendance in recent years has been fueled by an expanding domestic investor base alongside a growing tide of foreign flows. Investors today see in India a young, fast-growing, business-friendly nation. After years of public investment, newly constructed airports, bridges, tunnels, and roads are coming online, while investments in digital public infrastructure (digital identity, fast-payment services, etc.) are boosting innovation and efficiently reengineering public-private and private-private interactions. Sound monetary policies are supporting solid recoveries across several sectors, with credit growth accelerating.

For many of the prospective clients I speak with in Sweden, Switzerland, and Singapore, the question is no longer “Why India?” It is how best to take advantage of the opportunity. Should they invest in an India-dedicated fund, or in a regional fund that has exposure to India? An MSCI study shows that India’s market weight was below its share of the aggregate gross domestic product (GDP) of the emerging markets index.1 A dedicated allocation can overcome this underrepresentation.

The investment opportunity in India is both compelling and nuanced. Unpacking preconceived notions investors may have is therefore critical to gain a clear view into how to approach the India growth opportunity. To this end, three points are especially worth highlighting:

No. 1: India’s outperformance is a long-standing phenomenon.

The strong outperformance of India across 2022 and 2023 relative to other emerging and developed markets is really just the continuation of a longstanding pattern. This extended outperformance of Indian markets is a testament to the underlying strength and stability of the India growth story. The recent acceleration in GDP and other key metrics is built atop a long-tenured foundation of high-quality companies, some of which have a listed history of more than 100 years.

It is also noteworthy that this trajectory has come despite, and in some ways because of, a history of periodic brief market declines that act as a release valve on India’s tendency toward high valuations. Knowing when and how to take advantage of these selloffs, and to capture the mispricing opportunities that arise, thus becomes an important element in generating even higher returns. We see it as an oft-overlooked argument to those who might lean toward passive allocations. An active approach may help identify mispricing opportunities and manage risks, in part by providing access to actual, highly experienced humans on the ground with whom to compare notes on the timing of the cycles. Having an active manager with a mature, result-oriented strategy by your side can help capitalize on these cyclical occurrences.

No. 2: The India opportunity set is broad.

While many overseas investors are still only familiar with a handful of recognizable Indian mega cap stocks, the opportunity set extends well beyond that. India’s stock exchange is the oldest in Asia, with hundreds of solid companies spanning dozens of industries.

India’s economy is expected to grow quickly, which likely means a huge percentage of the future economy has yet to come into existence – and the structure of this “new economy” may not resemble that of the current one. With rapidly advancing technologies, investments in digital public infrastructure, rewiring of global supply chains, and the favorable demographics of India, we expect a significant number of new business models and start-ups to list, providing investment opportunities especially for active managers who can participate in new listings.

No. 3: India’s markets are highly transparent.

I am often asked how I can assess a company’s management quality. In my experience, disclosure levels in India are generally quite high, and judging the history of management decisions has not posed a problem. Again, regular, and keenly focused, attendance at shareholder meetings certainly helps.

This is not to say there aren’t exceptions. While most businesses have high thresholds for disclosures, ethics, and governance, a small minority may have demonstrably lower standards. Thus, I have developed a simple discipline: If management shows the slightest indication of not being transparent or honest, it’s time to move on.

1 Source: MSCI, The Rise of Emerging Markets and Asia. https://www.msci.com/research-and-insights/insights-gallery/emerging-markets


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