Long-term growth opportunities in the India consumer sector
With growth expecting to reach 11.5% this year, India is on track to becoming the fastest growing economy in the world. And if predictions are accurate, the country may become a world superpower by 2050. Of course, that's not to say the economy won't see ups and downs along the way. But the beauty of investing in an emerging market is that if we invest in the right companies now, long-term returns could be substantial.
A fast-changing marketplace
The Indian economy is changing fast. Rising salaries and an increase in disposable income is leading to growth in product ownership, while demand for higher quality, branded products is on the rise. This is a trend created by a burgeoning middle and upper-middle-class who are also spending more on travel, food, entertainment, and hotels than ever before. At the same time, India's growth remains way behind other emerging economies, so there are many investment opportunities to be found.
The expansion of the organised sector
As we enter the second half of 2021, India's organised sector continues to grow. This sector comprises government registered companies that offer guaranteed work to employees and must follow strict rules and regulations. The growth of this sector has led to an increase in homegrown manufacturing, resulting in increased employment opportunities. This is a good move for India's economy as the benefit of increased domestic production ensures the nation's deficit will continue to diminish.
Increasing wealth
India is home to the world's second-largest population that's growing richer all the time. That's not to say that 2020 and this year's Delta outbreak hasn't created its challenges. However, economists anticipate that per-capita income will be back on track this year.
Growing demand for consumer goods
Economists report that India is following purchasing patterns seen in China as its economy started to grow. Wealthier consumers begin to buy higher quality branded products, which is partly due to many purchases being replacement purchases – the typical moment when a consumer will upgrade.
The knock-on effect of this trend is that it has increased product sales in the organised sector. And that's why the organised sector is growing at such speed. Although it's fair to say that larger companies are growing faster than their smaller competitors.
At the same time, the white goods market is expanding by the year. Big-ticket items, such as airconditioning units, refrigerators and washing machines are also in demand, and there's an expectation that this trend will increase as India focuses on localisation. In addition, increasing disposable income has led to a high number of mobile phone and television sales, which is also a by-product of competitive prices and easy financing.
An increase in Indian-owned electronics manufacturing services (EMS)
A trend towards investment in Indian-owned companies continues, assisted by government incentives, import bans on air conditioners, and increased import duties. On top of that, the government's focus on local production is well set to benefit India, particularly with the growth of electronic component manufacturing, which will undoubtedly lead to increased exports in the future.
The growing food services industry
Increasing incomes, growing urbanisation, and a changing food culture have shifted the trend of cooking at home to eating out and ordering food online. Projections suggest that casual dining will only increase in popularity as more and more people move to cities for work. And a growing tech-savvy population is likely to boost online food delivery, which is anticipated to become the fastest-growing segment in the food services industry by 2031.
Online travel services
Although travel in India has been stopped in its tracks by the Delta variant, online travel services are well placed for growth. This is the outcome of heavy investment in travel infrastructure, which will show good results over the coming years. However, India is currently well behind both China and developed global markets regarding online travel services. But all things being equal, it shouldn't be long before they catch up.
Poised for growth
Growing consumer demand in India is leading to a wave of new domestic companies being set up across a range of consumer segments. As a result, opportunities abound, so our fund managers are busy analysing performance as each company upscales their business model to capture growing market demand.
Our investment strategy
To successfully invest in an emerging market, it's essential to be clear which companies are best placed for growth. Robust business models, talented management teams, a flair for innovation, and a focus on increasing market share all play a crucial role in a company's future success.
Long-term growth opportunities
At Clearwater, we work with two specialist fund managers. The Northcape Global Emerging Markets Fund and the Fidelity India Fund.
The Northcape Global Emerging Markets Fund invests in a range of companies in emerging economies worldwide. At the end of August, it had an allocation of 19.6% of its portfolio invested in India, which is the largest allocation to any country, reinforcing its confidence in the future of Indian companies. The Fidelity India Fund specialises in the Indian market. We invest in this fund so that we can grow the Clearwater Dynamic Portfolio.
Our long-term approach and confidence in the opportunity that India presents is the reason we have made an additional allocation to these funds. While we recognise that volatility will be above average as the Indian economy grows, we believe it adds good value and will help us achieve our targets for you.
by Gary Lucas.