As China's economic strength and prominence grows the world's second largest economy rightly attracts increasing investor attention. However there is another Asian titan you shouldn't ignore – India. Although it's not as large an economy as China many of the reasons why China has grabbed investors' attention hold true for India, with some of its fundamentals looking even better.
India has one of the youngest populations and a growing work force. "Economies and stock markets tend to perform well when the working population is growing and are able to add to productivity, rather than being a drain on resources," says Adrian Lowcock, senior investment manager at broker Hargreaves Lansdown. "GDP growth hit a three year low in June 2012, however this slowdown in growth is reaching a nadir and stronger growth will return in 2014."
With growing numbers of people becoming wealthier and moving into cities, consumption is set to rise. The country has a wealth of natural resources and is a significant agricultural producer - it's also massively under invested in infrastructure
And in September the Indian government proposed a set of investor friendly reforms including the relaxation of foreign direct investment rules, for example an increase in the amounts foreign investors can put into aviation, retail, broadcasting and trading.
"Like Japan India has been overlooked by retail investors and there is very little unprompted demand," say analysts at wealth advice website FundExpert. "It remains a fascinating opportunity for all sorts of reasons, among which are a positive stock market trend and very little debt, while it is probably a decade behind China in terms of development so there is huge growth potential. It is also less reliant on global trends."
Over the short-term Indian equities have exhibited a tendency to be more volatile but over the longer term they have produced superior returns. "The Indian stock market has been one of the best performers over the last 10 years or so reflecting a vibrant corporate sector and strong shareholder culture," says Adrian Lim, senior investment manager at New India Investment Trust. "Against this must be weighed the country's fractious political system and poor physical infrastructure, but India's main appeal is really the availability of choice across sectors and the experience its best companies have of managing through good times and bad."
The Indian stock market has a vast number of listed companies, and although the the BSE India Sensex 30 index rose more than 25 per cent in 2012, Avinash Vazirani, manager of the Jupiter India Fund, believes it has further to go. Reasons for this include the launch of the Direct Benefit Transfer Scheme which allows government subsidies on a list of 39 items to be paid directly into a recipient's bank account. "More is getting into the hands of those with the greatest propensity and need to spend it," he says. "Consumer goods companies should be one of the main beneficiaries of this new scheme as recipients spend the extra cash they receive on a range of products, and earnings growth among consumer stocks may well be subject to upward revision. Banks should benefit from having a significant number of new account holders and an increase in cashless transactions."
Funds for Indian exposure
Single country funds are high risk because of their focus on one area, so can be more volatile, and in emerging markets these risks are heightened. For this reason Mr Lowcock suggests that if you do not have a large portfolio, long-term investment horizon and high risk appetite, then you should buy into a global emerging markets fund rather than a single country India fund.
He suggests First State Global Emerging Markets Leaders Fund (GB0033873919), one of the top performing emerging markets funds and an IC Top 100 Fund, which has 11.3 per cent of its assets in India. Asian regional funds also include exposure to India, for example, First State Asia Pacific Leaders (GB0033874214) which has 13.4 per cent of its assets in India, more than double the amount in the MSCI AC Asia Pacific ex Japan Index. This is also an IC Top 100 Fund and in the first quartile of the Asia ex Japan fund sector over one, three and five years.
If you do have a large and well diversified portfolio, then you could consider a small allocation to an India fund, perhaps 1 to 2 per cent of your portfolio. There are not many UK domiciled India funds but a choice popular with a number of advisers is Jupiter India Fund (GB00B2NHJ040). Over five years its share price has returned 34.16 per cent against 19.42 per cent for its benchmark MSCI India.
The fund's manager, Avinash Vazirani, aims to identify stocks where there are strong growth prospects which have not been priced fully by the market. He also invests in deep value stocks where he feels there is a catalyst for a rerating, and builds large positions and runs with them for a long time, while their growth prospects are not fully reflected in the market. Consumer goods and financials each account for around 30 per cent of assets.
Funds offering exposure to India
| Fund | 1 year cumulative total return (%) | 3 year cumulative total return (%) | 5 year cumulative total return (%) | Total expense ratio (%) |
| Jupiter India | 0.72 | -12.85 | 34.16 | 1.88 |
| First State Asia Pacific Ldrs A £ | 19.08 | 36.41 | 77.18 | 1.55 |
| First State Global Emerging Markets Leaders A GBP | 17.81 | 40.30 | 92.29 | 1.58 |
| MSCI India GR USD | 7.71 | -11.15 | 19.42 |
Source: Morningstar (performance data as at 1 April 2013)
There are also two investment trusts providing focused India exposure, JPM Indian (JII) and New India (NII). New India, run by Aberdeen Asset Management's Asian team, considered to be one of the best, has by far the best performance and can still be picked up on a discount of 12 per cent. It has beaten its benchmark MSCI India by a good deal over one, three and five years.
India investment trusts
| Investment trust | 1 year cumulative total return (%) | 3 year cumulative total return (%) | 5 year cumulative total return (%) | Discount to NAV (%) | Ongoing charge (%) |
| JPMorgan Indian | 7.36 | -4.49 | 17.22 | 12.3 | 1.49 |
| New India | 10.60 | 12.42 | 65.34 | 12.15 | 1.53 |
| MSCI India GR USD | 7.71 | -11.15 | 19.42 |
Source: Morningstar (performance data as at 1 April)
There are a number of passive exchange traded funds (ETFs) which track India and have lower charges than active funds, including iShares S&P CNX Nifty India Swap (NFTY) which tracks the S&P CNX Nifty Index, 50 of the largest and most liquid companies listed on the National Stock Exchange of India. The ETF launched in 2010 since when the tracking difference between the fund and index has been 2.53 per cent. It has a TER of 0.85 per cent. The ETF gets its returns via a derivative swap rather than buying the shares, but uses multiple swap counterparties to mitigate the risk of one of them defaulting, and holds collateral worth more than the counterparty exposure.
But many argue that in less researched and inefficient emerging markets you should use an active fund with good opportunities to add value. India is an under researched market with modest analyst coverage so there are many strong businesses that receive less attention than they might elsewhere.
