Is it wise to invest in India, a rising global powerhouse?

Even though India's growth rate has recently slowed, investors can still profit greatly from its advancement

With net outflows of £8.3 billion in January alone, foreign investors have now sold more Indian shares than they have purchased in each of the last four months, raising a question about whether investors' passion for India is waning. India's stock market had a fantastic run, but since the fall, it has cooled off due to worries about the nation's faltering economy. For investors who are used to large returns, that is disheartening. India's stock market saw a 90 percent gain between 2020 and 2023, and it continued to grow by 16 percent during the first nine months of 2024. But the benchmark Nifty 50 index has dropped by 15% since September, which is the largest decline in the last ten years.

India's supporters think a return to form is imminent, but where do they go from here? According to Sukumar Rajah, director of portfolio management at Franklin Templeton Emerging Markets Equity, "we expect growth momentum to improve entering 2025, as government spending picks up again and consumer sentiment remains resilient." There are others who are more cautious. Deloitte highlights the challenging global economic outlook. "In order to promote sustainable growth, India will need to adjust to the changing global environment and capitalize on its own advantages.

The argument for keeping long-term exposure to India in your portfolio is still strong, though, despite this uncertainty. Even as early as 2027, the nation's economy is still on track to rank third in the world. With the number of Indians of working age as a percentage of the total population expected to continue increasing until the 2050s, demographics offer a significant benefit. Throughout the previous 30 years, the middle classes in India have grown at an average annual rate of 6%. Their increased disposable income gives the household a significant boost in spending.

India's economic transformation is still in its early stages.

Significantly, India is still in the early phases of the kind of economic change that drove China's explosive growth in the 1990s and 2000s. For instance, manufacturing, which currently makes up only 20% of the economy, has a great deal of room to grow. The Indian government has set a goal of exporting £1 trillion worth of goods by 2030.

India has started more than 20 metro rail projects and constructed 75 new airports in the last five years alone, demonstrating the continued support that infrastructure spending provides. Over the next five years, it now intends to invest an additional £11.4 trillion. In addition, it is spending £360 billion to double the nation's capacity for renewable energy.

This is not to minimize the immediate issues. The drawback of that demographic dividend is that India has a labor surplus, with millions of people vying for jobs that the public and private sectors are finding difficult to fill quickly enough. Consumer spending is currently being impacted by stagnant real incomes and declining wages.

For instance, in the automotive industry, car sales in the last few months of the year were significantly lower than anticipated. Western companies like Starbucks have slowed their growth in India due to disappointing retail sales. Given that 60 percent of the Indian economy is based on consumption, the government's most recent forecast calls for GDP growth of 6.4 percent through March 31. That would mark the slowest growth since Covid. The high costs that investors pay for Indian stocks are the other unanswered question and a recurring concern in India. On average, the market's price to earnings (p/e) ratio is 23 times. Compared to the average of 14 for emerging markets overall, that seems pricey.

However, the correction might be a chance for investors who trust India's fundamentals to enter the market at slightly lower prices than in the past. A premium over the majority of other markets, according to some analysts, is warranted considering the nation's long-term growth prospects.

Ben Yearsley, director of investment consulting firm Fairview Investing, states that "that valuation quickly comes down if earnings growth continues in the same vein as it has." Together with the US, Indian companies provide the highest return on equity globally; this is not a value or income market; it is a market that is expanding steadily. Comparing the Indian market to other emerging economies, it is of very high quality, with many businesses and robust corporate governance standards. The selection keeps growing: over 700 IPOs have taken place in India in the last three years.

It's worthwhile to investigate value-adding entry points into the market. Practically all Indian investors will seek opportunities through a collective fund in order to ensure portfolio diversification and professional management. Several investment trusts with a focus on India are available in the UK; some of them are presently trading at substantial discounts to their net asset value (NAV).

For example, the Abrdn New India Investment Trust (LSE: ANII) is trading at an 18% discount to NAV. The fund may be a lower risk option because it provides a comparatively defensive portfolio. Investing in small and mid-cap stocks at a 12 percent discount, the India Capital Growth Fund (LSE: IGC) is another BFIA favorite. On a tiny premium of 1%, there is also the highly regarded Ashoka India Equity Investment Trust (LSE: AIE).

The bottom line: Many investors will believe that the size of the long-term opportunity is highlighted by the fact that Indian stocks only make up 4% of the global stock market capitalization. It appears underrepresented in what will soon be the third-largest economy in the world and a driving force behind global growth, albeit at somewhat slower rates than in recent years. Despite potential setbacks, India enthusiasts are still optimistic about the country.