Recently, I mentioned India as one of the top themes this year. However, I wanted to go further in-depth into this thematic opportunity. As a theme, India is often overshadowed by its emerging market peer, China. If China were the star of emerging markets, India would be like an understudy.
China’s market performance has been in the doldrums for most of this year. However, it rallied at quarter end thanks to Beijing’s September 24 announcement of aggressive stimulus to support its flagging economy. The VettaFi China Large-Mid Cap Index was up 22.9% in September and is now up 42.5% YTD as of 10/7/24.
China and India are competing for investor attention and assets. The VettaFi Large-Mid Cap India Index traded off 4.5% in October as investors shuffled the deck in emerging markets. That said, the index is still up 18.3% YTD. The chart below shows how the two lines diverged at the end of September.
India Poised for Opportunity
While many investors have been waiting for a China turnaround, India has been helping bolster EM returns. It’s up 12.3% on a 3-year annualized basis vs. -5.8% for China. Underpinning India’s superior investment performance has been its economic growth story. The IMF recently upgraded its annual growth forecast for India to 7%.
So, what are some of the main catalysts behind India’s growth story?
- Growing Working-Age Population – Unlike China, which has demographic challenges that are a legacy of the one-child law, India has a growing working-age population. Over the last decade, the population has grown by 100 million, and it has a fast-growing, young population in addition to a rapidly expanding middle class. Approximately one-third of the population is estimated to be between 20 and 33 years. This could provide a demographic dividend and help drive economic growth for decades. BMI Research projects that India’s consumer market will rank 3 in the world by 2027, driven by the growth of its middle class.
- Regulatory and Government Support – The Indian government led by Narendra Modi’s Hindu nationalist party has embarked upon an ambitious program of regulatory reforms to make the country an attractive option for international investors. These structural reforms have also resulted in significant infrastructure investment.
- Connectivity and Digital Infrastructure – Thanks to improvements in India’s connectivity and digital infrastructure, internet users have soared, with more than half of its citizens now connected to the internet. The government has also created a decentralized digital infrastructure platform, known as the India Stack, that is helping digitally transform the economy. India’s universal biometric digital ID system, Aadhaar, has enrolled 99% of the country’s population. It enables people to use fingerprint or iris scans as a unique identifier. Anyone in the country can access education, healthcare, welfare subsidies, e-commerce, financial services, and more through their digital identity. India’s digitalization is inclusive, free, and not app-dependent.
- Low-Cost Manufacturing—While already known for outsourcing services like call centers, India is also well positioned to benefit from foreign companies seeking to reduce their overreliance on China for low-cost manufacturing. For example, Apple is seeking to move some of its iPhone production to India.
ETFs with Exposure to India
Consumer-oriented India ETF plays have delivered the strongest YTD performance among non-levered ETFs. At the top of the list is the passively managed Columbia India Consumer ETF (INCO ), which has amassed $478m in assets and delivered a YTD return of 26.7%.
Other ETFs focused on the digital consumer are the VanEck Digital India ETF (DGIN ), which has $27m in assets and a YTD performance of 23.8%. Meanwhile, the India Internet ETF (INQQ ) is up 18.3% YTD and has $50 million in assets under management.
Van Eck also has the VanEck India Growth Leaders ETF (GLIN ), which offers a broader market approach targeting companies with strong financial metrics that offer the potential for strong growth at a reasonable price (“GARP”). It does not focus on a particular segment within the India market but instead offers a core product with fundamental screening. It has delivered returns of 22.3% YTD and represents $162 million in assets.
The WisdomTree India Earnings Fund (EPI ) also utilizes a fundamental screening approach targeting earnings. It is the leader in terms of assets under management, with around $4 billion in assets, and has returned 19.6% YTD.
It’s also possible to target small-cap opportunities in India with an ETF. The iShares MSCI India Small Cap ETF (SMIN ) returned a solid 20% for the year. It has just below $1 billion in assets.
Risks to Consider
While flows into India and market returns have suffered lately in the face of a stimulus-induced China rally, the long-term story for India remains intact. However, one risk to consider is the political situation.
In June, Indian Prime Minister Narendra Modi was sworn in for a third term following the world’s largest elections. Modi is only the first Indian leader to be elected for a third time since 1962. But his Bharatiya Janata Party (BJP) could not secure a parliamentary majority this time. Ultimately, India’s digital and economic future hinges on continued government reforms.
For more news, information, and analysis, visit the Direct Indexing Channel.
