Investors in Asian markets have recently found their attention being steered back to China. A series of major stimulus measures have generated headlines and reignited interest in the world’s second-largest economy.
Our own response has been to keep engaging in disciplined stock-picking. China has consistently accounted for around a tenth of abrdn Asia Focus plc’s assets, and this remains the case today.
This does not mean, though, that China leads the way in our country allocations. By a comfortable margin, the lion’s share – or maybe the tiger’s – belongs to India, which makes up more than a quarter of our holdings.
India is currently the world’s fifth-largest economy. According to the International Monetary Fund (IMF), its GDP is approaching $4 trillion – compared with China’s £18 trillion.
Yet size, as they say, is not everything. What sets India apart is its rate of growth, which saw GDP increase by 7.6% in 2023 – compared with 5.2% for China and, by way of further context, 2.5% for the US.
The power of leapfrogging
There are several reasons why India has been able to cultivate this advantage in recent years. They include the rise of the middle class, the strength of the domestic capital market and the sheer scale and pace of tech-enabled disruption.
The last of these factors is particularly interesting from an investment perspective, as it underlines India’s capacity to benefit from “leapfrogging”. This is a phenomenon that increasingly defines many leading emerging markets (EMs).
Leapfrogging occurs when an economy is able to embrace the very latest innovations rather than incrementally working through their less efficient predecessors. This is usually made possible by a relative lack of “legacy” infrastructure.
For example, why was India able to adapt to the advent of mobile phones so quickly and effectively? The answer is that landlines had never been widely deployed in the country, meaning there was little or no barrier to positive change.
The irony here is that technological exclusion once held back many EMs. Now they often have unrivalled scope to jump straight to the cutting edge, unburdened by the lingering patchwork of piecemeal progress that tends to underpin their developed counterparts.
Digitisation and the role of smaller companies
India’s digital transformation offers remarkable evidence of this turnaround. The nation’s burgeoning tech infrastructure is principally built on Aadhaar, which is a biometric ID scheme, and Pradhan Mantri Jan Dhan Yojana, which is a financial inclusion programme.
Together, these two initiatives have spurred take-up of the Unified Payments Interface (UPI), a real-time payment system that facilitates inter-bank transactions through mobile phones. The National Payments Council of India has estimated UPI will encompass 750 million users and 100 million merchants by 2027.
The figures are already striking. Supported by around 550 participating banks, UPI processed approximately 14 billion transactions – worth almost £200 billion – in a single month earlier this year.
Crucially, mass adoption of UPI is driving further innovation – much of it from the bottom up. As a result, India’s small and medium-sized companies are increasingly helping shape the country’s growth story.
This, of course, is abrdn Asia Focus plc’s area of expertise. We believe our specialised regional knowledge is vital in identifying the “hidden gems” likely to play a part in the continued success of India and other Asian EMs.
Looking ahead
India is currently the world’s fastest-growing major economy. It was responsible for 16% of all global growth in 2023 and is expected to maintain much of its momentum over the next few years.
Barring a truly spectacular turn of events, China is highly likely to stay ahead in GDP terms for some while yet. $14 trillion represents quite a gap, after all.
Yet India is set to become the third-largest economy on Earth by 2028. Purely in terms of purchasing power parity, a measure used to gauge countries’ economic productivity levels and living standards, it can already lay claim to this distinction.
Earlier this year, in the run-up to the parliamentary elections that saw Prime Minister Narendra Modi’s Bharatiya Janata Party retain power, we met with more than 25 Indian companies. Our discussions with management teams provided valuable insights into individual businesses’ outlooks.
More broadly, these direct engagements told us a good deal about India’s prospects as a whole. We were suitably impressed. Whether you think of it as a tiger or a frog, in our opinion, this market holds significant long-term attractions for investors.
Important information
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Emerging markets tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Other important information:
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