I EXPECT reviews of the best-performing areas this year to be dominated by one country – India. In a landslide victory not seen since 1984, Narendra Modi was elected prime minister in May. His strong pro-market, pro-business agenda is expected to pull India out of the dark at last. The country’s stock market has risen strongly on the promise of political and economic reforms.
Modi is abolishing many archaic labour laws and incentivising competition between individual states with the aim of rebuilding industries such as the diminishing manufacturing sector. Historically, a business needed more than 40 licences to trade, and companies with more than 50 employees were required to seek government approval before firing an employee.
This was a significant barrier to growth, stopping companies competing on a global stage as they were reluctant to take on more than 50 staff. Indeed, more than 80 percent of Indian businesses have fewer than 50 employees.
Alongside a manufacturing renaissance, Modi is hoping to improve the country’s infrastructure, including building 100 new “smart cities”. India has a strong relationship with Japan and many of Modi’s reforms have been compared favourably with those introduced by his Japanese counterpart, Shinzo Abe.
Modi has introduced three people to the cabinet, two of whom are Japanese, with the sole purpose of maintaining the India-Japan relationship. Japan is providing investment for infrastructure projects, including a freight corridor linking four key areas within India.
The government is working to change the population’s mentality of welfare and entitlement by reducing the number of subsidies. It has taken advantage of the recent fall in the oil price, for example, to deregulate petrol and diesel, which is saving the economy billions.
It is not just foreigners noticing these changes in India. After 10 years of shying away, domestic investors are increasingly shifting their focus from property and gold back to the stock market. India is largely self-reliant and not dependent on exports, so the slowing world economy is less of a concern than in many other emerging markets.
The promise of reform has been enough to drive the stock market higher this year. It was interesting last week to get the views of Neptune Investment Management, whose outlook remains positive. James Dowey, the chief economist, expects significant divergence between emerging-market countries over the next few years, with India one of the big winners.
The Neptune India fund has been one of the best-performing Indian funds this year. It is managed by Kunal Desai, who joined Neptune in 2010 as an analyst before taking over management of the fund in December 2012. Its exposure to firms that perform better in a stronger business environment, and a bias towards medium-sized companies, have had a positive effect on performance this year.
I would suggest long-term investors should consider a small exposure to India as part of their portfolio. As an alternative to a unit trust, JP Morgan runs an Indian investment trust that is trading at a 10 percent discount (although this investment has a higher exposure to large Indian companies). I believe India could be one of the most exciting investment stories of the next few years. – The Independent
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.uk