ROELOF FEENSTRA: Federal Reserve pivot will favour India as an investment destination

The macroeconomic environment is likely to favour emerging markets as the Federal Reserve pivots, and expected rate cuts in the US will likely weaken the dollar. Countries such as India, therefore, make a compelling investment case, with long-term mega-forces such as a vast youthful population, a burgeoning middle class and the rewiring of its supply chains through economic reforms and sectoral developments.

India’s economy has been one of the fastest growing in the world. Over the past two decades the country has experienced average annual GDP growth of 6%-7%. The IMF forecasts India’s GDP to grow at about 6.8% in 2024 and 6.5% in 2025. If it can maintain this pace of growth, the economy is expected to double in size by 2030, making it the third-largest economy in the world. This sustained economic growth is primarily due to the country’s robust domestic consumption, a vibrant private sector and progressive government policies aimed at liberalisation and globalisation. 

One of India’s most significant advantages is its demographic profile. With a population exceeding 1.3-billion, it recently became the most populous country in the world. It also has a young and dynamic workforce, with about 65% of the population under 35 and about half of that segment below 25, offering a vast pool of labour, innovation and consumption capability.

India’s rapidly expanding middle class is another cornerstone of its investment potential. Goldman Sachs forecasts a sizeable jump in consumer spending, with 100-million people in the country expected to become affluent by 2027, up from 60-million. With increasing disposable incomes, urbanisation and changing consumer preferences, there is a surge in demand across various sectors, including retail, real estate and consumer goods. The retail industry, in particular, is thriving, fuelled by a boom in e-commerce. Major global players such as Amazon and Walmart having already made investments in India’s retail market, underscoring its potential. 

Urbanisation in India is occurring rapidly, leading to the development of new cities and the modernisation of existing ones. The Indian government has launched several ambitious projects to improve urban infrastructure, transport networks and logistics. These initiatives are expected to create numerous investment opportunities in the construction, real estate and transport sectors. 

The government has undertaken numerous policy measures to enhance the business environment and attract foreign direct investment (FDI). For example, the “Make in India” initiative, which aims to transform India into a global manufacturing hub, has already led to Apple shifting some of its production there. Tesla plans to set up a manufacturing plant soon. Such measures have helped enhance the ease of doing business in India and made the investment climate more favourable. 

India’s growing tech industry is another pillar of its investment appeal. The country has a thriving information technology sector and globally recognised tech hubs and companies. Moreover, its growing focus on digitalisation has revolutionised its digital infrastructure and opened new avenues for investment in technology and innovation. The country has numerous tech giants, innovative start-ups, talented engineers and IT professionals. 

While India presents numerous investment opportunities, investors should be aware of inherent risks. The rupee has a history of high volatility, which can have a negative effect on investment returns. Other risks include regulatory and policy uncertainty due to frequent changes and bureaucratic hurdles. Additionally, infrastructure and logistics bottlenecks such as inadequate transport networks and power shortages can affect business operations and increase costs. Political uncertainty, geopolitical tensions and security challenges introduce further risks for investors. 

Even though the Indian stock market is the world’s fourth biggest, it is too complicated for individual investors to invest directly in Indian stocks. They must register with the country’s financial market regulator and adhere to its disclosure requirements. Consequently, global investment platforms do not offer individual investors the ability to execute directly in Indian stocks. Generally, only institutional investors that manage foreign funds invest directly in Indian stocks as they have the resources to satisfy the regulatory requirements.   

There are two solutions though: investing via depository receipts of Indian stocks listed on a foreign stock exchange, and investing via an exchange traded fund (ETF). Depository receipts are negotiable certificates issued by a depository bank representing a specified number of shares — usually one share — of a foreign company’s stock. The depository receipt trades on a non-Indian stock exchange as any domestic share would. 

Numerous depository receipts reference Indian shares that trade on foreign stock exchanges, representing some of the larger stocks. For instance, Infosys, one of the world’s biggest IT consulting and software services businesses, trades as a depository receipt on the New York Stock Exchange. We understand that in time Indian businesses will be able to list directly on foreign stock exchanges without using a depository receipt programme, which will be an exciting development. This will improve the liquidity, pricing and quality of Indian investment opportunities. 

For most individual investors the simplest way to obtain broad exposure is to invest in an Indian-focused ETF that is traded on a foreign stock exchange. However, many Indian ETFs can be considerably smaller and less liquid than investors are accustomed to. Due to this, pricing will be volatile and fees higher. We highlight some of the available ETFs: 

• iShares MSCI India ETF (INDA — US): tracks the performance of the MSCI India Index and is the largest Indian equity ETF. 
• Wisdom Tree India Earnings Fund (EPI — US): gain broad exposure to the most prominent Indian companies. 
• Columbia India Consumer (INCO — US): invests in fast-growing Indian consumer companies.
• Global X India Active ETF (NDIA — Australia): This active ETF invests in India based on a bottom-up and structural tailwind perspective. 
• Simplify Tara India Opportunities ETF (TARA — US): an active ETF focused on outperforming the MSCI India Index. 

The Indian growth story is well known, and this is arguably priced into Indian stocks, with the Nifty 50 Index trading on an average forward price-earnings multiple of 21.4 times. This valuation rating will not present a hurdle so long as India’s economic growth continues along the current trajectory, in which case investors will be rewarded. 

• Feenstra is a portfolio manager at Independent Securities.