So much of the Asian story has been dominated by China. The sheer number of power stations and airports that China is building over the next couple of years is mindblowing but the fact is that the situation is similar in India. However, India may have been slower to respond than China.
Perhaps that is one of the disadvantages of democracy. The Chinese do not need to consult the people. They just tell them when to move and they get on with it.
In some respects, the Indian democracy is far more left-wing than the Chinese. The British gave the country a legacy of bureaucracy and regulation. Past Indian governments have been slow to respond to reforming and freeing up the markets and this has held them back. This is starting to change both internally and through perceptions externally.
The First State India fund was launched in November 2006. The firm already had an existing fund but, as I have often commented, offshore funds do not get the same amount of publicity as their onshore brothers. The fund is run by Vijay Tohani, who joined the company as a senior analyst in April 2000.
He initially covered China and South-east Asia until the end of 2000 and now focuses on emerging Asia and, in particular, Korea and the Indian sub-continent.
Despite the strong rise in the market, Tohani still sees the growth drivers of the Indian market as being very much intact. He sees three structural themes: Demographics are having a very strong pull on consumption. Half the Indian population is under 25. The population is over double the US, UK and Germany put together. In the next 20 years, another 200 million will join the workforce compared with 20 million in the US and a 30 million decline in Europe.
Agriculture used to be 60 per cent of GDP and the economy was dependent on the monsoon season but that was 15 years ago. Now, services account for more than 50 per cent and with this the economy is evolving in a more stable way. The more affluent middle and upper classes are growing, with 20 per cent more dollar millionaires in 2005. The top 1.5 per cent of the population account for over 1.5 per cent of GDP. Companies such as Bharti, the world’s fastest-growing GSM operator, recently beat forecasts despite optimism towards the company. Capital expenditure on infrastructure is expected to be $350bn by 2012. India is a huge continent and is lacking in roads. Even its once vaunted railway system is beginning to creak.
Here, companies such as BHEL, which is India’s biggest engineering company, are in the front line for creating greater energy capacity. India has the skill sets. Its intellectual capital is enormous, with English-speaking emphasis on engineering and science. Companies such as Infosys, India’s leading IT software developer, lead the way. Five years ago, this firm had 9,800 employees. Today it has 66,000.
Tohani makes a point that it is not just among bigger companies that there are opportunities.
On the micro level, there are great opportunities for stockpickers as there are some great entrepreneurs among the medium-size companies.
One of the points he makes is that money goes far further in India because Indian companies have been starved of capital. Their return on equity is far higher than that in Asia and, in particular, China where too much capital has probably been misallocated.
Clearly, the country comes with its own risks. It has been a big beneficiary of the higher-risk appetite among investors. If this change, which it is bound to do from time to time, expect the Indian market to take a tumble.
Inflation has trended upwards too and is at the top end of 5 per cent although the central bank has recently tightened rates. India is also a major importer of oil so a big increase in oil prices would be a problem.
Politics, unemployment and bottlenecks in the infrastructure are all there to cause problems, too. However, once this reform process has started, it is going to be hard to stop and India looks to be a major beneficiary of industrialisation. Indian companies incidentally have very high corporate governance standards and the quality of management is far higher than that in China.
Finally, valuations look on the rich side, at least viewed historically. They can be justified if earnings’ growth stays so strong.
The Indian economy is likely to be two or three times bigger in five years time. This is very much a domestic story which is not totally reliant on the US or global economics.
There will be problems on the way but this is a genuine growth area for the next 20 years. Perhaps now is the time to put down a marker, at least in a regular savings plan, and treat any correction in the market as exactly that and pile in more money.
First State is an extremely well resourced company in this area, with an investment team of 52 and almost 13bn under management. Its more conservative risk-adjusted approach makes it one of the safer pair of hands in India.
Mark Dampier is head of research at Hargreaves Lansdown.