India could be a jewel in the crown for investors in the long-term
In a recent letter to investors, Jeremy Grantham, co-founder of the famed Boston-based asset management firm GMO, stated that he "would own as much emerging market equity as career or business risk can tolerate". In 2000, Grantham successfully predicted that US stocks were in for a rough ride over the next decade. He also successfully predicted the crash in Japan in the late 1980s, among other big long-term calls.
Emerging markets include countries such as India, Poland, Hungary, the Czech Republic, and countries in Latin America and south-east Asia (not including Australia). Emerging market equities trade at roughly a 50pc discount to developed markets equities, yet they have far better prospects for growth, trade at attractive currency valuations, and have generally experienced declining inflation rates.
Emerging markets hold the majority of the global population and generally have very favourable demographics (a large driver of long-term returns) - yet only about 10pc of the world's equity funds invest in them. Over the long run, it is a certainty that emerging markets will make up a much larger percentage of global equity funds.
In general, emerging markets such as India, southeast Asia (excluding-Australia), Latin America, and emerging Europe (Poland, Hungary, and the Czech Republic) present staggering opportunities for the long-term equity holder. India is the biggest story of the next decade. Nobody can predict what will happen in the next year, but if you have a 10- or 20-year view, buying Indian equities on share or stock sell-offs should be very rewarding.
India has a huge demographic boom behind it with a dynamic young population. An Indian born in 2010 is expected to spend $175,000 in their lifetime. By 2023, one billion of its 1.5 billion population will be under the age of 30 - this will be the largest workforce on the planet. Change is rapid. Infrastructure growth has been astounding - people get around faster with less impediment. Mobile phones are almost everywhere - even in rural areas. Internet quality in India is better than in first world countries in many regions. India's economy has experienced massive positive reforms over the last few years. Inflation targeting has brought inflation down. There has been a lot of investment in infrastructure. India has a new goods and services tax, and a new bankruptcy law - as have more efficient real estate processes. These changes are building a foundation for growth in corporate earnings in India.
Indian equities are one of the biggest investment opportunities in history. India doesn't come without risk, though. In contrast to most other emerging markets, the Indian stock market is very expensive on a valuation basis. This means that Indian equities will be exposed to global volatility in a downturn, regardless of how resilient the real economy may be to any shock. India only recently came out of a recession, so it's in the early stages of a new economic cycle, which means that economically it should be fine. However, knowing that many major developing markets are in the late stages of their economic cycles, volatility in developed markets would certainly affect the prices of Indian investments.
My bet though over the very long run, is that any global downturn or fit of severe volatility (which usually happens once or twice a decade and could certainly occur soon in the US) should create a wonderful opportunity to invest in India - from a long-term perspective.
- David Flynn is chief investment strategist with Baggot Investment Partners (baggot.ie)
Sunday Indo Business