Postcard from India

The Indian market presents investors with a dilemma. On the one hand, the backdrop is extraordinary: India’s economy is growing and diversifying, a large and rising middle class is driving consumption, while astute government policy is helping draw international businesses to the country. The problem? After a strong 2023, market prices reflect much of this growth.

The Indian economy is thriving. It has been a beneficiary of China’s weakness as firms diversify their supply chains. Apple, for example, is pivoting iPhone manufacturing towards India, with ambitions to manufacture 25% of all iPhones in India by 2025, up from just 5% in 2022.

Increasingly, central governments, states and businesses are coming together to support development. US chipmaking giant Micron has begun constructing a chip assembly and test facility in Sanand, Gujarat. Examples such as this are helping create a diversified pathway of growth for the Indian economy, rather than being dependent on services or consumption.

The rising middle class also remains a key feature of India’s economic growth story and this should drive momentum in areas such as real estate. The central government is continuing to invest in infrastructure, recognising that it is a key element to support foreign investment and domestic growth.

Surging growth and hot stocks

This is the backdrop for surging economic growth in India. It is also the backdrop for strong corporate earnings, which have been a key factor in driving the Indian stock market over the past 12 months. Earnings for companies in the MSCI India rose by around 20% in 2023.

However, this strength has also left some parts of the Indian market looking ‘hot’, particularly among smaller and mid cap companies. These have benefited from strong domestic flows, which have pushed up prices. There is no catalyst for a slowdown – high economic growth is likely to continue to support earnings – but we can see some areas taking a pause.

Against this backdrop, we are trying to focus on areas where there is strong visibility on growth, but valuations still look reasonable. With that in mind, we are looking at those companies benefiting from infrastructure and capital expenditure investments – engineering services company ABB India or electrical wiring manufacturer KEI Industries, for example. We are also investing in communications infrastructure, including groups such as Bharti Airtel and some of the large digital online plays.

Elsewhere, there is a breadth of consumer companies in the market, from ‘core’ areas such as food and drink, to digital consumption groups. For core exposure, we have positions in groups such as Hindustan Unilever, but have sought to balance this with more discretionary exposure, such as jewellery retailer Titan Industries.

Protecting investors in tougher markets

We remain focused on high quality companies. This may mean that we may not keep pace with rising markets, but it should protect investors in tougher markets. Our view is that while the outlook for the Indian economy and corporate earnings remains extremely positive, market performance could take a pause. There are risks that investors revise their very low expectations for China, for example, and there is some reallocation away from India. We will take advantage of any corrections when they arise.

India is a multi-year growth story. It is important to remember that India remains at an early stage in its growth trajectory, with GDP per capita around one-fifth that of China. Its growth is exciting, but it will need time to build and diversify. We will be there to support Indian companies as they grow.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

The value of investments and the income from them can fall and investors may get back less than the amount invested.
Past performance is not a guide to future results.
Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
The Company may charge expenses to capital which may erode the capital value of the investment.
Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘sub-investment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
Yields are estimated figures and may fluctuate, there are no guarantees that future dividends with match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.