India has been one of the fastest growing large economies in the world in recent years and is projected to become one of the top three economies before the end of this decade. India’s growth journey continues to present long term wealth creation opportunities for investors. Let’s delve a little deeper into the factors driving India’s economic growth and the broad themes which present opportunities for us as investors.
Why India:
- As part of China plus one strategy, many global companies and investors are looking at alternative markets like India.
- India’s Production Linked Incentive (PLI) scheme is giving a boost to domestic manufacturing across sectors.
- Global investor interest in India has been rising in recent years given the structural changes in the country.
India’s Growth Story:
- Consumption, rising urbanization and higher demand for financial services are some themes which are expected to benefit due to India’s demographics.
- By the end of 2030, about 80% of India’s population will be millennials or younger with a median age of 30 years. Millennials prefer to invest in financial assets rather than physical assets. Over 50% of new investors in mutual funds are millennials.
- Financialisaton of savings is reflected in the rising SIP inflows into mutual funds. In the month of August, the SIP inflows into mutual funds were to the tune of USD 2.84 Bn which is a 49% YoY growth. Increasing formalisation of the economy would also help increase financialisaton of savings.
- Domestic manufacturing across a wide range of sectors is expected to benefit India’s GDP.
- India’s digital infrastructure is expected to provide growth opportunities to financial services and e-commerce.
- Political stability in India assures that the process of reforms will continue.
This re-iterates that India is a unique and differentiated market with a relatively uncorrelated growth story to the rest of the world.
India Markets Update:
- The July 2024 forecast by the International Monetary Fund (IMF) shows an upward revision in growth for India to 7% in 2024, up from 6.8% in its April 2024 projection1. This is in keeping with the view of a general boost to consumption and a revival in rural consumption demand trends that could reduce the urban rural consumption growth gap. The Reserve Bank of India (RBI) maintains a 7.2% growth projection for India in FY25 based on strong domestic macroeconomic factors and stable external factors2.
- RBI remains focused on achieving sustainable price stability considering resilient growth and inflation moderating with slight unevenness and would prefer to ensure sustainable price stability and inflation moving towards the target on a durable basis3
- The small and midcap segments have witnessed robust performance over the past two years. Earnings growth for these segments is expected to surpass large caps over the next two years. Although valuations are higher than historical averages and relative to large caps, strong earnings growth could still lead to respectable equity returns. However, equity returns may trail earnings growth along with higher short to medium term volatility.
- A long-term horizon and higher risk appetite is recommended while systematically investing in these segments. An investment approach which balances large caps with small and midcaps could better manage risk. For investors with lower risk tolerance, hybrid funds can be evaluated as they provide the likelihood of lower downside risk. We believe RBI to continue:
- to ensure that the inflation expectations do not spillover on the broader components and derail the progress made so far. In our assessment, the RBI may find itself in a position to ease monetary policy from current levels in H1FY25 while expecting rate cycle may not be deep in India.
- to use all tools at its disposal to keep market conditions consistent with its monetary policy stance. It is likely to deploy an appropriate mix of instruments to modulate liquidity so that money market and interest rate curve evolve in an orderly manner while preserving financial stability.
- to be proactive on its liquidity management in case of heavy inflows because of bond index inclusion. We believe excess liquidity can impede progress on RBI's path towards disinflation and dilute its monetary policy stance.
- We find short and medium tenure on the interest rate curve attractive on a risk adjusted basis. Our funds across maturities are positioned accordingly against their respective mandates.
Global Markets Update:
The Franklin Templeton Investment Solutions team regularly catches up to check if it is time to make changes to portfolio allocations due to the current equity market volatility. They discuss the factors driving the recent selloff, the probability of a recession in the United States and what their strategy is, given market conditions.
Some highlights here:
- Enthusiasm for artificial intelligence related stocks drove the stock market rally in the first half of this year. This very narrow leadership was less than healthy, as corporate fundamentals remained supportive, but not evenly spread across the market. As a result, some rotation into assets had lagged the rally. Over the month of July, this was most prominent in smaller companies, which might benefit from lower interest rates.
- Softer US labor market data following growing signs of macroeconomic deceleration, have partially prompted a significant equity market correction.
- Even though the rise in reported unemployment is large enough to lead to comparison with the early stage of previous recessions, we do not see the current labor market being so negative.
- We continue to expect inflation normalization in the US but acknowledge this is usually a bumpy process.
- Recession probability in the US has risen but remains relatively low.
- Government bond yields have fallen in recent weeks and the price of high-quality bonds have appreciated sharply.
- Fixed income markets are reflecting a more benign inflationary environment and the prospect of a developing rate-cutting cycle
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