Dear Friends and Clients,

 

We aim to stay ahead of the curve by identifying powerful, long-term, structural trends and then implement the most appropriate investment products in an effort to extract value.  This endeavor is referred to as ‘thematic investing’ and we refer to it regularly within the portfolio updates in our quarterly notes.  Our goal in writing this piece is to provide insight into our investment process and give client's a better understanding of how and why investments go into their portfolio.

 

One of our favorite themes is the rapid growth and transformation of India; it has been integrated into portfolios since day one for our early clients.  India is poised to become one of the world’s largest economies, driven by a young and tech-savvy population, a rising middle class, and government policies which encourage innovation and infrastructure development. From the explosion of digital services to renewable energy initiatives, India’s economy presents a fertile ground for growth across various sectors and in our opinion an abundant investment opportunity. Within this theme, our clients currently have exposure to consumerism and increased technology use.   

 

As with any investment, there are risks, and we acknowledge there will be business cycles and potential headwinds that need to be monitored along the way.  We touch on some of these towards the end of our note, however, continued monitoring and research helps us to identify changing trends in an effort to maximize returns while managing risk.

 

We feel most traditional portfolios (retirement, longer term) need international exposure; many of our portfolios contain exposure internationally to Latam, Southeast Asia and India (vs. Africa, Europe, Middle East).  However, we’re going to focus on India as we believe this is a 10+ year theme and we continue to allocate incoming clients as well. 

 

We are always available for questions and comments; please feel free to reach out.

 

Best,

Brad Banken, Investment Advisor Representative

 

Allison Banken, COO

 

 

In order to appreciate India's current state, and the projections for growth, It's helpful to have context to the political and economic conditions India has endured over the past few decades.

 

Through the 1990's the Nehru/Gandhi dynasty lost power, and the country faced a currency collapse causing a default on India’s foreign debt.  They also suffered US sanctions after a nuclear bomb test and the Kargil War.  In 2004 after a sudden change in government, their stock market was -17%.  In the past, India was grouped into a “Fragile Five” of emerging market economies. It had structural issues: corruption, poor infrastructure, and failed government services which also caused the banking and energy sectors to struggle. 

 

Prime Minister Narendra Modi took office in 2015; since this time, he and his administration have implemented policies that have set the country up for a turnaround.  In addition to improved corporate governance standards and political stability, ease of doing business has led to growth in services and manufacturing.  Quality of living has also increased which has helped to lower unemployment and lift many out of poverty. 

 

Other reforms and endeavors include a digital biometric identification system, united payments interface (digitize monetary transfers vs cash economy), and a “Made in India” tax system for goods and services.  There were also initiatives to boost government manufacturing.  Modi’s reforms will continue to be implemented (bankruptcy code, real estate regulations, digitization, etc.) to make doing business easier across the corporate landscape. 

 

Digitization was an incredibly impactful change to India’s society through the opening of bank accounts and subsequently collection of tax revenues.  Historically tax compliance was a challenge given it was a 70% cash economy; this led to the government being underfunded - infrastructure and big projects were non-existent.  Tax revenues should continue to grow in the high teen percent through 2025, and as citizens continue to benefit from digitization, so should government funding and infrastructure projects.  Despite having the 5th largest GDP, it is growing at the fastest pace of the group and is positioned for growth due to the key factors we’ll be highlighting.

 

Modi is now the second PM in the last six decades to serve a third consecutive term (he was recently reelected). Most predict he will continue to connect the country physically through infrastructure (highways, airports, etc.) and virtually (internet connectivity, mobile phones, bank accounts).

 

 

India is the largest populated country in the world with ~1.4B people and has a median age of 29 (for context the US is ~333M and median age is 38).  79% of India's population is under 50.  The sweet spot for any country is when retirees and children combined are the smallest part of the population - India is HERE.   China reached that in 1984 - which was followed by two decades of solid growth, and we expect India to follow this blueprint. India should be in this ‘sweet’ spot for another 25 years!  India also enjoys the largest population of English speakers with roughly 250 million people.  This also supports economic growth and Indian exports.

 

For context, Japan, Italy, China, Germany and France are either seeing an initial population decline or will see it shortly.  A shrinking workforce can lead to labor shortages and reduced productivity.  A growing elderly population can lead to financial burdens on the healthcare and pension systems. India will continue to enjoy productive demographics until 2050 and is projected by the UN to start shrinking in 2065. 

Modi’s investment into mobile and digitalization from a cash economy has increased the amount of taxes collected, allowing for more revenue to invest into the economy.  Initially, infrastructure was a hindrance to increased manufacturing efforts, but the situation has improved.  For example, the national highway length has increased by 60% in the past 10 years.  It is estimated $530Bn+ will be spent on new infrastructure in the next two years.  The growth in two years could exceed all spending on infrastructure built over the 11 years combined.  

 

Source is Seeking Alpha

 

Greater manufacturing efforts began in 2014 with PM Modi’s "Made in India" initiative.  This led to the launch of production-linked incentives that looked to leverage opportunities within diversified global supply chains. The government's target was to raise manufacturing's contribution to 25% of GDP; after a slow start, the goal is likely to be reached by 2025.

During the semiconductor chip shortage, incentives were introduced.  India created ~$25Bn USD subsidies in addition to creating joint ventures with Japan, Thailand, Korea, and the US in order to attract investments.  The sector was 78% dependent on imports in 2014 and is now 97% self-sufficient.  

 

India has become a manufacturing powerhouse.  Apple is planning to produce ~25% of all iPhones by 2025 in India. Micron built a $825M test facility.  Boeing opened its first distribution center and Samsung has the largest manufacturing facility in the world in India.  In Q2 2024 Google began manufacturing its Pixel devices in India.  This, combined with Apple’s production, puts India as the second largest mobile phone producer globally.  Going forward, there is still so much room for growth as the GDP/per capita is ~$2,600 USD (IMF).  Continued momentum leaves a very long runway for investors and the economy. 

 

 

At present time, China has the largest digital population in the world. Remember China and India both have a population of roughly 1.4B.  China is currently home to 1.05B internet users which is ~340M more users than India.  Another way to look at that is 76.4% of China's population is now online, compared to 52.4% for India.  This means that India has the largest ‘unconnected’ population which was ~680M at of the start of 2024 (more than double the 336M unconnected in China).  We feel this untapped market, combined with the current demographic characteristics, presents an incredible tailwind to growth.

 

If development and government initiatives continue to advance India, the Indian consumer

will adapt new technology at a record pace.  Internet penetration has increased 400% in the past decade.  In 2012 it was 12.8% in 2012 and in 2022 it was 48.7%.  That is an increase of 692 million people in 10 years and Statista forecasts another 244M households coming online by 2028.  Increasing internet and mobile phone usage should continue to drive growth and consumerism.

 

At the start of 2023 1.1Bn people had mobile phones, or 77% of the total population, and 467M people were using social media.  One interesting trend to note is that by country, India has the most users of both YouTube and Instagram globally.  However, two thirds of their population have yet to come online.  The number of online shoppers is predicted to reach ~427M by 2027; currently e-commerce as a percentage of retail sales is 47% for China and only 6% for India.  The convergence of these digital trends combined with India's demographic set up could lead to quite the runway for a consumer driven middle class.  

 

Currently, India is the fifth largest economy in the world, however growing at the fastest rate within that group helped by being in its' sweet spot demographically (see graphic just below). If you look at GDP per capita, India is well below this group but poised to become a global GDP growth champion over the next several decades.  Out of 186 counties in the world, India ranks 125th at around $10,123 in GDP per capita.  For context, Japan is $54k, the UK is $58k, Germany is $67k and USA is $85k.  With India's rising middle class, government initiatives, friendly foreign investment policies, there is a long runway for GDP growth and GDP per capita.

 

As the economy develops, access to capital, the rising middle class, and supportive governmental administrations, could help smaller companies by driving growth and consumerism at more local levels.  By 2050 it is expected to be the third largest economy, behind China and then the US and by 2075 is expected to outpace the US.  

 

India has maintained a neutral approach globally as it aligns with the West in terms of being the largest democracy and English-speaking country in the world, but also buys oil from Russia.  India is only the 9th largest import trading partner with the US currently; due to the aforementioned dynamics they have room to move up in importance to the US.  There are various reasons why manufacturing continues to move away from China, the world is diversifying its' supply chains and India is expected to be a net beneficiary.  

 

While India was once a frontier economy (this is the class prior to ‘emerging market’) and as already gained importance within the emerging market group.  JPM recently added it to their emerging market high yield bond which is telling us that JPM has longer term confidence in the stability and growth projections of the economy.  For reference, including developed economies, India is currently only 1.75% of the stock ACWI Index and is 2.35% of the MSCI all world index (US is 63%).   India is currently ~19.9% of the Emerging Market Index.  

 

It is not surprising that within the Emerging Market Indices, India is taking share at the expense of China.  To illustrate, if you were to buy $100 worth of MSCI Emerging Market Index, 3 years ago the share of that $100 would have bought $11.70 of India.  Now, it would buy $20 worth.  For all of the reasons we've illustrated, continued foreign support and investment in India should only support this trend.  

 

There are always potential risks with any investment and dynamics require monitoring for any changes.  The country is still developing in terms of infrastructure; while they have come a long way, there is always some degree of bureaucratic red tape that still exists for these projects.  

 

In terms of investing in an Indian company through an ETF, there is also currency risk for this country.  Changes in the rupee’s value vs the dollar could impact returns.  Additionally, India shares borders with Pakistan and China and they have been adversaries in previous military conflicts. While India has enjoyed a stable government and general neutral stance geopolitically, political shifts or disruptions (especially with its' border neighbors) could lead to policy changes that affect markets, such as sudden reforms or protectionist measures. 

 

Although corporate governance in India has improved, instances of accounting fraud, poor disclosure practices, or insider trading could occur that would harm investor trust in certain companies.  As an emerging market, India is sensitive to global economic conditions. Rising interest rates in developed countries, trade tensions, or global recessions can lead to capital outflows and stock market volatility.

 

India is redefining its role on the global stage.  Bureaucratic reforms under Modi’s governance have simplified business operations and fostered a more favorable economic environment.  The overhaul of the monetary system through digitalization has increased transparency and efficiency in a traditionally cash heavy economy.  This has allowed an increase in tax collections, which in turn has providing funding for infrastructure projects.  The rising capital expenditures, from both government and private sectors, will support manufacturing efforts and the country’s growth.  Consumption patterns are shifting as the GDP/capita is rising from basic needs to aspirational across the growing middle class.  

 

India is the largest populated country in the world.  It also enjoys the largest democratic population, largest English-speaking population and the world's fastest growing economy. Despite this, it still has one of the world's lowest GDP per capita along with two thirds of its population that has yet to benefit from technology use.  It will benefit from maintaining its relatively neutral stance geopolitically.  Its weightings have also increased in emerging market indices, which we expect should continue.

 

For the aforementioned reasons, we would expect Indian exposure to be in the majority of our portfolios within international allocations.  To express this theme, each portfolio could have one to four Indian ETFs that provide the greatest risk reward exposure:

info@oakstreaminvestments.com