First quarter growth figures for India released last week show that India’s economy grew 6.1 per cent in the first three months of 2015.

While the results are some way below analyst forecasts of 7 per cent, many believe the country represents the best emerging market growth prospect of the future. So, is now the time to invest in India?

Rewards

Despite last week’s relatively disappointing results, many indicators point to a bright economic future for India.

In March this year, the International Monetary Fund forecast the Indian Economy would grow by 7.5 per cent in 2015-16. If these calculations are correct, India would be the fastest growing emerging market in 2015, surpassing China – a country long-regarded as the number one emerging market growth prospect and one that is on course to supersede the US as the world’s preeminent economic superpower. In April, Moody’s revised India’s credit outlook from stable to positive, and mooted an upgrade next year.

India’s vast population – at 1.27bn, it is the world’s second largest country, accounting for 17.6 per cent of the world population – gives businesses, both national and international, a vast consumer market for goods and services.

Moreover, India’s population is scheduled to rise; McKinsey estimates the country’s urban population will reach 590m by 2030. This is to be contrasted with China, which faces a potential demographic collapse in the near future, due to its one-child policy and ageing population. Not only are increasingly fewer people contributing to the public finances via taxation, but retirees spend far less than those of working age, curbing economic growth.

Juliet Schooling Latter of Chelsea Financial Services thinks India offers investors a number of opportunities, noting that India is “one of the few growth spots in the world at present.”

She notes that India has a strong investment heritage. The country is home to a number of highly developed stock markets – the Bombay Stock Exchange, for instance, is the oldest and fastest in Asia.

“This makes for a highly conducive environment for investors. Furthermore, the Modi government has introduced a number of incentives for foreign investors, including reducing taxes on investment income,” she says.

India is also comparatively cheap, in emerging market terms. Economic slowdown in 2013 rattled investor confidence, and led many to reduce or close outright their Indian holdings – and while sizeable growth has returned, investors haven’t.

“Compared with historic prices, Indian stocks are a bargain. Those that have bought in the past two years and waited for a bounce back have been rewarded,” says Schooling Latter.

Risks

Inflation is a common concern for emerging market investors. Such worries are not without foundation; currently, the 20 countries facing the highest rates of inflation are all situated in the emerging world.

However, Rahul Sharma, managing director of India focused fund Neev Capital, notes that inflation in India has both reduced and stabilised in recent years – and low oil prices, coupled with the exportation of deflation from China, Europe and Japan, mean that the picture will remain the same for years to come.

“While inflation will still be a mild risk if you invest to preserve capital rather than grow it, current Indian growth projections raise the question of why you would pursue preservative objectives in the first place,” says Sharma.

The prospect of a US interest rate hike is another worry for prospective investors. While such a move by the Federal Reserve would not be without implication for emerging markets, India may be the best-positioned to weather the storm.

“In 2014, the rupee was the only emerging markets currency to appreciate against the dollar. This is symptomatic of the overall strength of the Indian economy, and rising foreign investment inflows,” says wealth manager Kathryn Langridge.

“When the US eventually raises interest rates, the rupee will likely continue to outperform its peers, limiting investment outflows from India and supporting the currency and markets. There is a case building up for India getting delinked from other major economies.”

Schooling Latter believes that despite growth projections, volatility may lie ahead. However, she suggests that investors sit out the storm, rather than run at the first sign of trouble.

“The country’s potential is far from fully realised, so think about how your investment will look in 10 years’ time, rather than six months’. Those who invested £1,000 in India 20 years ago would hold £6,700 today – so bear that in mind.”

Fund Recommendations

Schooling Latter recommends the Jupiter India fund, noting that the fund focuses on long-term capital growth.

“The fund is s not strictly concentrated on India alone – companies based in Bangladesh, Pakistan and Sri Lanka are also represented, as are firms that derive a significant proportion of their business from India,” she says.

Adrian Lowcock, head of investing at AXA Self Investor, recommends the Kotak India Mid-Cap fund, which primarily invests in equities, and equity-linked securities, of Indian mid-capitalisation companies.

“Investing in emerging market equity funds is always a risk, because of high volatility. Nonetheless, the managers know the market well, and are adept at identifying quality growth companies. The fund returned 71 per cent over 2014,” says Lowcock.

Wealth manager Philip Gee offers a number of recommendations.

“The Fidelity India Focus fund is at least 70 per cent invested in listed Indian companies – the rest is a varied mix of companies with exposure to India, from a number of different countries. It’s a long-term prospect, so may not be suitable for investors looking to sell up within five years,” he says.

“For those seeking diversified portfolios, the JO Hambro Asia ex Japan and Asia ex Japan Smaller Companies funds have 26 and 20 per cent exposure to India respectively.”

The iShares MSCI India ETF is a lower-cost option. It seeks to emulate the performance of the large- and mid-cap companies on the Indian MSCI index, and has a low annual charge of 0.67 per cent.

“Tracker funds are often regarded as more appropriate for developed markets in North America and Europe, but India’s stock market pedigree makes them just as viable there as in the UK,” Gee concludes.

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