How Aussies can invest in India's growth

Investors seeking the historically high returns from broad emerging markets (EM) portfolios have largely been left disappointed since 2021.

Over the past 10 years, EM portfolios became overly reliant on China to power returns.

When the Chinese economy started to falter following lengthy COVID lockdowns and issues related to their property market, EM Funds generally went down with it.

How does India compare with China?

Investors are now looking to fill this void, with a strong candidate emerging in India.

The Indian market reached the US$1 trillion market capitalisation milestone in 2007. The next trillion would take a decade, after six years of equity market growth were lost to the GFC.

However, having reached the US$2 trillion mark in 2017 it would take only four years to reach US$3 trillion in 2021 and only two more before the US$4 trillion milestone late last year.

It's no coincidence this acceleration of growth has coincided with important milestones for India and its economy.

Last year India was declared the most populous country in the world, overtaking China. Arguably more insightfully, the median age of India's population is just 28 years old, 10 years younger than China and the U.S.

India also now boasts the highest projected economic growth rate amongst major developed and developing nations. Having overtaken China since 2021 at an average growth rate of 8.2% p.a. compared to 5.5% p.a.

India now sits as the world's fifth largest economy with plenty of room left for growth.

From a more ideological standpoint India's willingness to encourage foreign investment has seen global supply chains begin to shift toward the nation.

What has triggered India's growth, and will it continue?

India's large, young, tech-savvy, and well-educated workforce should provide both the foundation for economic growth, as well as a domestic consumer base to fuel it.

Despite having doubled in the past decade India's GDP per capita still sits below US$3000 ranking it amongst the lowest in the world.

Should its rapid growth continue to accelerate, household income will rise, and a new middle class should emerge. This could continue to drive a structural rise in domestic consumption fuelling the economy internally.

As promising as this sounds the arguably bigger catalyst for India's growth is coming from external forces.

Led by Prime Minister Narendra Modhi India has undergone economic and market reforms to drive productivity and encourage foreign investment. Since his election in 2014 India has:

• Experienced 375% growth in exports,
• Doubled its number of national airports, highways, and railways,
• Quadrupled the number of metro cities, and
• Improved internet penetration from 25% to 93%, amongst other initiatives.

These developments have coincided with the developed world and particularly U.S. companies shifting away from Chinese manufacturing. India has effectively repositioned themselves as the primary global alternative for labour intensive manufacturing - working to entice the supply chains of major companies including Samsung, Lenovo, Dell and iPhone manufacturers to their shores.

How can Indian equities fit in Australia portfolios?

Wile the Indian economy is humming, which is powering its equity market at the same time, Australian investors may still want to take a considered approach to investing in the region.

From an asset allocation standpoint India would find in an investors emerging markets allocation as a higher risk exposure with the potential for higher growth.

In terms of getting exposure in the benchmark Indian Nifty Fifty index tracks the largest 50 companies listed on the Indian National Stock Exchange. However, much like the Australian market India's broad index is concentrated in financials making up close to 35% of the index.

This might be problematic for Australians interested in the region for two reasons. Firstly, a lot of Australian investors are already exposed to large financials on the ASX and this could dimmish the diversification benefits of a broader portfolio.

Secondly, and arguably more importantly for investors looking to benefit from India's structural growth, it is likely sectors out of financials will be the bigger beneficiaries of India's positive outlook.

For instance, it is more likely the countries information technology, consumer staples, and consumer discretionary sectors will see the greatest benefits from a booming middle class and foreign direct investment.

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