The equity market is on a tear since March whilst India remains one of the fastest-growing major economies in the world right now. The robust macroeconomic story is well known. India is undergoing a cyclical upswing, with several factors at play including a buoyant property sector that stands in stark contrast to real estate troubles elsewhere. The banking sector has some of the best balance sheets seen in over a decade whilst the government is pursuing infrastructure spending with zeal to support growth. Consumer sentiment is improving from the dark days of Covid; urban demand is robust, and the optimism is gradually spreading out to rural India.

More broadly, India’s share of global trade is on the rise. Easing restrictions from the government has resulted in higher foreign direct investment flows into the country.

The deep dive

The reality on the ground is equally as encouraging as the upbeat macro picture. A corporate profit boom is underway. For the July-September results season, profits are up 41% year-on-year and, on average, earnings are in line with the market’s expectations. In fact, corporate earnings are expected to grow at 20% year-on-year for the full fiscal year, backed by strong company fundamentals.

Whilst the numbers illustrate one half of the picture, the other half comes from anecdotal evidence. This year we have met a variety of companies (holdings and non-holdings) on multiple trips to India to gather a more holistic view of the situation. Many of them responded with universal enthusiasm on the direction of government policy. One CEO even remarked, “In the past, India grew in spite of government, but today, we are growing because of government.”

India has consistently unveiled pro-growth budgets over the past few years, with a sizeable emphasis on public infrastructure spending. This is a positive trend because infrastructure challenges have been a hurdle to growth before. Take logistics cost as an example – it is significantly higher in India versus the global average, resulting in painful repercussions for the economy. The Modi government aims to bring down the cost over the next five years by developing industrial corridors between major Indian cities. Together with ongoing developments in road, airport, waterway, and digitalisation of the sector, we would expect Indian logistics to become more efficient and globally competitive over time.

Many of our other meetings were equally encouraging. ABB India’s CEO told us he is optimistic about the current industrial capital expenditure cycle in India and expects future growth to come from lower-tier cities. As a power engineering company with a diversified portfolio, ABB India benefits both directly and indirectly from the government’s infrastructure development push.

Similarly, the large private banks and the non-bank finance companies (NBFC) were upbeat about credit and deposit growth in the country. In our portfolios, we prefer to hold more private banks than NBFCs, and our core holdings are ICICI Bank, HDFC Bank and Axis Bank.

Indian banks are generally well-capitalised and the best of them generate attractive returns. The sector continues to have a huge growth runway given how relatively low credit penetration is in India and demand for basic financial services remains high. Digitalisation is also helping banks tap into underserved markets, particularly in rural areas.

It is worth noting that Indian corporates do not rely heavily on capital market flows as a major funding source, which reduces their potential volatility and broader risks. Moreover, the rise of domestic institutional and retail investors has reduced the reliance on global capital flows, which has contributed to the relative stability in the Indian equity market.

Mitigating risk

Exposure to the Indian market is never without risk. In our three decades of investing in the country, we strongly believe in having a bottom-up active strategy that focuses on long-term quality. That means avoiding companies that are highly leveraged or rank low on corporate governance, regardless of how their share prices perform.

We saw this play out earlier in the year when Adani Group, which enjoyed a meteoric rise in 2022, was targeted by a critical ‘short-seller’ report. It highlighted issues that were already known to us and were precisely reasons why we have avoided investing in the conglomerate.

Whilst the incident did not irreparably damage investor sentiment towards the Indian market, it reiterated that the myriad opportunities available are never without risks. An active strategy focused on Quality is still very much fit-for-purpose in a market as bright as India.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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