Channel: Investment

19 May, 2010
Perception vs. Reality – Investing in India
By Arun Mehra
There is an increasing voice of investors talking about timing their investments in so called emerging markets with the now famous “BRIC” word being used generally. The “2008 Experience” has left people with a vulnerability that has clouded risk and returns definitions as well as eluded them from the strategic shifts taking place in the world economy.
The fact that pension funds and their returns from investing in UK will remain mediocre has not really dawned on people. Now where does India stand in this global allocation or for retail investors in UK trying to save up for their pension or grow their capital? Lets us start with facts – India as a market open for foreign investors has a history of about 16-17 years when the then current Prime Minister initiated the reform process in the capacity of the Finance Minister. If you look at returns say since ’94 – the market has returned approximately 13% till end Dec ’09, 22.6% over the last 10 years and 29% over last 5 years. These are good numbers and certainly make for a long term investment case. During these years, the country, the economy, the market and the very nature of life in India has undergone a drastic change towards consumerism and materialism but let us first understand why the last 5 years have been so good.
Clearly, the first few years of the economy opening up were very uncertain in terms of the reform process, government policy as well as the health of the macro indicators. It was like a gold rush for the starved corporate sector with no licenses required for producing basic things like steel, cement and saw huge capacity creation. This then led to a huge over supply across industries and with lack of regulatory clarity for infrastructure development saw the market stay in a narrow range for several years. The so called Information Technology revolution had not blossomed as yet.

Source: Morgan Stanley Research, Bloomberg   April 2010


India till 2003, as shown in the chart above, was an under loved child, capital constrained with very few investors roaming the streets. Then came the huge gold rush and saw everything go up to the stratosphere in a short period of time. India went from an under capitalised economy to a place where capital was desperate to be deployed and had lost its value. All industries had over optimistic growth plans and we saw the first “mini bubble” across asset classes in India from property to stocks to people. The “bullish” sentiment with excess availability of capital was bound to make the capital allocation process not only difficult but also fraught with errors. We all know what happened after that and the result it had on market returns. However, this happens in all markets and we live with greed, frenzy and fear as investors. The huge spike in a short period of time has altered the market dynamics in India with few very large companies. This means the large companies are well discovered and offer market related returns vs. the broader market which will have more opportunities.


So, where is India today and why the so called categorisation of it being a high risk market. The political process has come a long way with more uniformity in economic thoughts and macro policy among the different political parties. The process of regulation and infrastructure development is being addressed and is well under way to attract billions of dollars in investment. The market is well governed; the balance sheet of the country is fine with a few pot holes on fiscal deficit but something that can be dealt with by a strong government. The knowledge industries are growing and providing employment to the youth. There are lots of things to be done, but the direction is clear and that is towards growth. The government is focused towards inclusive growth and is spending a lot of money on rural initiatives. The change over the last 10 years has been profound and this makes the country a very strong contender for capital.


The correction in 2008 was healthy and needed, though a global collapse in the financial system does not occur very often in one’s life span. Hence, one should not extrapolate or give undue attention to an event while investing for the long run. The banking sector in India is robust and well run. The India story has steadily moved to a higher growth plane over the last 20 years as the economy has opened up.


Does this in any way mean high risk? I think, certainly not. The structure of the economy makes it resilient with an agriculture dominated society and close to 70% living in small towns and villages. Their consumption in every way is very low and hence provides huge potential for increasing consumption. The urban part of India continues to move forward with rising incomes. There are several India’s within the country and hence, one can sell products across income classes. The level of infrastructure investment is increasing every year and is creating a huge need for capital. Companies are improving productivity and expanding capacities as demand improves. The government is investing more in rural development through many initiatives and all that bodes well for the long run.


All in all, the India opportunity is one of being patient and is a must for every investor in the UK. There is a lot of work to be done in areas like:

  • Social, healthcare development
  • Agriculture and land reforms
  • Infrastructure
  • Reduction of corruption and increased accountability

However, this is all work in progress and like ten years ago it was hard to make money and invest in infrastructure and today the companies have to select the work they want to do given the abundance of projects, all new areas will be looked at in the same way and these will happen too. The direction is clear, things in India happen slowly and after a lot of obstacles, but once they start it is a flood and that is where the opportunity comes.


India is not China and will never be. India has rule of law, democracy and a well developed legal system vs. none for China—India has a much better and more efficient market based system. Earning growth in India is much more stable, has been in the past, and will be driven by long term demographics and growth. Also, ROE – Return on Equity is higher in India vs. China. In 2008, China increased lending to fight its way out of recession.


Loan Credit to GDP for China is now 120% vs. only 50% for India. China has pumped the economy by instructing the banks to lend vs. in India there is nothing like that. The asset issues in China will have to be dealt with as the loan quality becomes an issue.


To conclude, India is a patient investment which will yield very good returns for people who understand that the country risk is no longer relevant, the macro policy is good and the opportunity will be in emerging businesses in India.


Arun Mehra is the Investment Director of V.E.C Investments, a Mauritius based investment manager of Indian Equities. Previously, as Head of Investment Strategy & Portfolio Manager was involved in setting up all of Fidelity International’s India Investment Operation from 2003 -2006 including setting up the India based equity research group, the investment process for top 500 stocks, launching the International and Domestic India Funds and managed $4bn in Indian equities. These were the first Fidelity funds launched for India both onshore and offshore. Mr. Mehra received an MBA from the University of Chicago, and M.Sc. from the University of Arizona and a Bachelors of Engineering from the University of Delhi. He can be reached at


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