Indian equities are among the worst performers this year compared to other big emerging markets like China and Russia. The Bombay Stock Exchange’s Sensex has lost more than 13 percent year to date, while the Shanghai market is down about 9 percent and the Russian index down 10 percent.
India faces many short-term macro challenges including a string of corruption scandals and persistently high inflation. Fears that rising borrowing costs and an overall global slowdown will hurt corporate profits continue to weigh heavily on sentiment towards Indian equities.
However, the long-term story in India continues to be attractive, and there are a few Indian firms posting strong performances despite global uncertainties. But investors must understand the unique positioning of companies considering the backdrop of global macro issues. Investing without a clear understanding of the environment can lead to sub-par performance.
With that in mind, here are two key themes to consider and assess:
Strong Consumer Consumption
Unlike China, India has one of the youngest population profiles in the world, with more than 70 percent of the population under 35, according to the latest Indian Census. As economies grow, the middle-class tends to expand and that is what is happening in India today. Citigroup estimates that the middle class (people with an income of between $6,000 and $30,000 a year) is around 160 million, and within five years, this is forecast to grow to 267 million people.
One only needs to walk down the bustling streets in any major Indian city to see that consumption is alive. While high inflation certainly does negatively impact middle class consumption, in the long term, a favorable demographic bodes well for economic growth over the next 20 year.
As a result, look at companies that are poised to capitalize on the Indian consumption story. Companies like Hindustan Unilever, the Indian unit of Unilever, which sells personal care products and packaged food, may hold promise for investors. The firm reported a 21 percent growth in profit over July-September this year with sales expanding 18 percent, and has been raising prices, which should help boost value. The stock is one of the best performers on the BSE Fast Moving Consumer Goods Index.
The transportation industry (auto and motorcycle) sales tend to rise as the middle class expands. According to the Society of Indian Automobile Manufacturers, India’s automobile industry is expected to grow 11-13 percent in the fiscal year ending March. India’s largest motorcycle maker, Hero MotoCorp (formerly Hero Honda Motors) continues to perform well; the company posted a 19 percent rise in quarter two profit.
Additionally, Hero MotoCorp’s recent break from its 26-year joint venture with Japan’s Honda Motors is seen as a positive as it gives the firm the opportunity to explore new products and export markets.
Investors should note that even for these strong companies, raw material costs, high inflation and weak currencies, are all legitimate concerns. However, these concerns are in the short to medium term. In the long term, we see demand that is likely to thrive.
India’s Niche in the Tech World
Despite an uncertain global environment, Indian IT firms still have managed to hold their own. The recent July-September quarter results reflected stable growth for Indian IT companies with no major downside surprises.
Over the years, Indian tech companies have successfully found a niche in the back office of companies in the more established economies. Indian tech firms continue to provide low costs IT solutions and have been able to maintain global economic market share. The cost differentials are significant enough for services to still be priced at a level that is highly competitive relative to other countries.
There is recognition among India IT giants that they need to go beyond just low cost outsourcing. Some, like TCS, are adopting strategies to climb up the value chain by offering higher-value services.
Infosys, a company that provides business consulting and technology outsourcing services, continues to perform well. While many Indian companies are highly diversified, Infosys continues to focus on its core strength and target its service offering.
Another tech company, Wipro, is beginning to show encouraging volume growth of 6 percent quarter on quarter, and increased revenue from all geographies despite a difficult global environment. In its latest second quarter report, revenue from America and Europe increased by 2.2 percent and 6.8 percent quarter on quarter, respectively.
However, the short-term issues facing India are serious. Headlines of fresh corruption scandals continue to weigh on investor sentiment.
As with any emerging market risks have to be factored into investment decisions. But short-term concerns must be measured against long-term opportunity. India, while facing challenges, can be a profitable investment for prudent investors. Choose wisely and with a view towards participating in future trends. That's the best strategy for maximizing the odds for investment success.
Michael A. Yoshikami, Ph.D., CFP®, is CEO, Founder, and Chairman of YCMNET’s Investment Committee at YCMNET Advisors, Inc., a registered investment advisory firm. He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org