Investment Professionals

India: Down But Not Out

Published: 5th December 2019

Product in Focus: ETFS Reliance India Nifty 50 ETF

Key points:

  • India’s economy has underlying strengths and over the past 12 years has become an economic powerhouse, jumping from the 11th to the 5th largest economy in the world.

  • After a 2 year slow down, India’s outlook remains positive. RNAM forecasts GDP growth to recover towards 7% over the next 12-15 months.

  • NDIA allows investors access to the Indian share market, a notoriously difficult region to invest, by tracking the performance of 50 of India’s leading blue-chip companies.

India has been increasingly moving into the spotlight of many investors in recent years. Over the past 12 years India has jumped from the 11th to the 5th largest economy in the world and is likely to take 3rd position within a decade. This makes it difficult to ignore India when building a global equity portfolio.

Further, the recent launch of ETFS Reliance India Nifty 50 ETF (ASX: NDIA), Australia’s first Indian-focused ETF, has provided investors with ready access to a market that was previously difficult to invest in.

The case for India

Structurally, India’s economy has underlying strengths that have enabled robust growth and provide a strong macro story.

  • Demographics: with a median age of 28 years, India’s population is highly skewed towards young working-age people who drive both income and consumption. By 2030 India’s median age is forecast to rise to just 31, compared to 40 in the U.S. and 42 in China. Further, a dramatic urbanisation of the population is in progress, which will create a massive need for infrastructure investment across housing, transport, communications and utilities.

  • Low debt levels: To this point Indian economic growth has not been excessively reliant on debt. Household leverage in India remains one of the lowest in the world, which presents a huge opportunity for sustained economic expansion.

  • Strong domestic consumption: Nearly 60% of India’s GDP is driven by domestic private consumption, as compared to 40% in China. This provides India with a degree of protection against external demand shocks. Furthermore, India’s per capita spending is way below China and more in line with levels seen in China in the mid-2000s.

  • Progressive reforms: India has undergone many reforms in the last 5 years. Most have been aimed at increasing compliance and transparency and removing red tape across the financial system. Longer-term, a stable and reform-focused regime should support an environment conducive to business and investment.

Future Outlook

While Indian growth has slowed over the past two years, the outlook remains positive. Reliance Nippon Life Asset Management forecasts GDP growth to recover towards 7% over the next 12-15 months. Key factors driving near-term growth include;

  • Corporate tax cuts: India has recently reduced its effective corporate tax rate to 25.1% from over 30%. In addition, firms who set up new manufacturing units will enjoy an effective tax rate of 17.1%. This is expected to attract significant investment from foreign companies looking to access India’s domestic market and those looking to diversify away from China as uncertainty continues with regards to the global trade and tariff situation.

  • Infrastructure spending: Government initiated infrastructure projects are a key driver of the Indian economy. It was recently announced that India will spend about $US 1.4 trillion over the next five years on projects including, for example, doubling the number of highways, airports and the capacity of ports, building 50 new metro systems in cities, electrifying and standardising the rail network and improving both rural irrigation and household access to piped water.

  • Monetary policy: The RBI has cut policy rates by 1.35% over the past year to 5.15% to provide stimulus to the economy and counter the weakness seen in global demand.

  • Low inventory levels: Inventory levels across the economy are well positioned to provide a favourable base for a recovery across the manufacturing sectors.

2d7fe60b8c5f44598f0e1cab54341f3c.JPG

Access to India

The ETFS Reliance India Nifty 50 ETF offers Australian investors the ability to access the Indian share market via the ASX for the first time.

NDIA tracks the Nifty50 Index, which is the primary benchmark for the Indian equity market. It not only provides a measure of the performance of 50 of India’s leading blue-chip companies, it also provides a representative picture of the entire Indian market. The 50 constituents account for 67% of overall Indian market capitalisation and 53% of total trading volume, as well as providing a broadly similar sector exposure to the wider market.

a235fe35deca4183a76ef4a843d0a7df.JPG

0dab273dbbb94c25b42683d0fd894a13.JPG

Trailing returns

16cfb1f989df4283bda98659f271c830.JPG

Using India in a portfolio

Investors looking to take a meaningful exposure to the Indian growth story should consider taking an exposure beyond broad emerging markets/Asia. India currently accounts for just 2.6% of global equity market capitalisation, despite having over 17% of the world’s population and 9.5% of the world’s GDP. In comparison, China, which is the most comparable country from a population perspective, currently accounts for 8.2% of global equity markets. [1] A tactical overweight to India would provide investors with a fairer reflection of India’s potential.

While historical data does not present the entire picture of the Indian growth opportunity as it stands today, it is worthwhile investigating the impact that a heightened India exposure would have had on historic portfolio returns. To do so, we focus on the Asia ex Japan segment of world equity markets and compare the performance of the MSCI Asia ex Japan Index, which includes roughly a 10% allocation to India, to a portfolio comprised of 90% MSCI Asia ex Japan and 10% Nifty50 Index. The blended portfolio contains approximately a 19% India allocation. Cumulative returns over the past 20 years are shown in Chart 1.

4b9ee3eb8653476881fac68e72fc10c2.JPG

Over the full 20-year time series, the portfolio including the Nifty50 outperformed by 0.51% per annum, exhibited 0.5% per annum lower volatility and saw a 1% lower drawdown. By extension, risk-adjusted returns were also improved.

Table Y summaries the portfolio risk and return characteristics over 3, 5, 10 and 20 years to give a picture of the contribution India would have made over a range of time horizons. In each case the over-weighting of India was positive for the portfolio from both a return and a risk perspective.

b22cf326d61a4de6a91213b45d21938f.JPG

Fund in Focus

Name

ETFS Reliance India Nifty 50 ETF

ASX Code

NDIA

Management Fee

0.85%*

Benchmark

Nifty50 Index

Inception Date

19 June 2019

Distributions

Annual

[1] Source: Bloomberg as at 30 November 2019.

*Plus expense recoveries up to a maximum of 0.15% p.a.