• Poor governance has overshadowed India’s ‘demographic dividend’
  • Acceptance of Modi’s reforms will bring millions of Indians into the formal economy, creating growth opportunities
  • We have increased our exposure to liquid Indian equities with steady earnings growth 

Henna Hemnani, Miton multi-asset fund range team comments:

“The working-age populations of many of the world’s leading economies are now in decline. There are, however, some parts of the world with more favourable demographics and therefore more attractive long-term economic growth prospects.

“India is benefitting from what is called the ‘demographic dividend’; accelerating economic growth as a result of a change in the age structure of the population. More specifically, India’s labour force is growing faster than the population dependent on it, leading to an increase in per capita income. By 2050 its working-age population is expected to grow to over one billion, dominating growth in the region. The demographics here have presented a huge economic growth opportunity for some time now, but this has been overshadowed by other factors, particularly poor governance.

 “India’s reform agenda under Prime Minister Modi, and importantly the wide acceptance of his reform agenda, is a tipping point. In November 2016 Prime Minister Modi announced the demonetisation of all 500 and 1,000 INR banknotes, which was explained as an aggressive attempt to fight black money. Although the initial reaction was negative, Modi’s recent landslide victory in India’s most populous state, Uttar Pradesh, suggests that the act has been widely accepted, even by the more rural and poor states that were thought to have been affected the most. Another supportive data point of Modi’s reform agenda is that consumer confidence is high. Perhaps people are focussing on the long term benefits of reining in corruption.

“Emerging markets have a tendency to leapfrog developed markets, for example many emerging markets skipped the landline and went straight to the mobile phone. Similarly, demonetisation encourages leapfrogging into a digitised economy. This could bring millions of Indians into the formal economy, and more importantly, with all transactions being recorded, this could make corruption a thing of the past, potentially transforming India.

“We have recently added to our positions in India across the Multi Asset fund range. We feel increasingly positive about the market as there seems to be good progress on reform which is being widely accepted. India is a good diversifier to the rest of the portfolio as it is a domestically driven economy and the positive demographic backdrop has a low correlation to the macro environment.

“We care a lot about liquidity and being able to sell securities easily is an important risk management tool. We screened the Indian equity index for highly liquid companies with steady earnings and revenue growth, sensible valuations and low family ownership and leverage. We bought several of the stocks that met the criteria to create a basket of attractive companies while minimising stock specific risk. We are aware of other risks, for example foreign currency, and have therefore scaled the position appropriately and will continue to monitor it closely.”

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