August 2016, James Brown, Portfolio Manager
Already a force to reckon with, emerging markets are commanding more economic and political power as they grow and flourish thanks to rising trade and investment. Economist and financier Antoine van Agtmael, coined the term ‘emerging markets’ as a marketing catchphrase in the 1980s1 and while definitions vary today, broadly speaking, emerging markets are those nations with an economy progressing toward becoming more advanced, usually by means of rapid economic growth and industrialisation.
So what is the appeal? By 2025, annual consumption in emerging markets is expected reach $30 trillion2—something leading management consultancy McKinsey & Company say is “the biggest growth opportunity in the history of capitalism”3, and we believe one of the brightest of those markets is India.
Capitalising on change
Captivating, compelling and utterly chaotic, India is a true land of contrasts and of opportunity. Its 1.25 billion people comprise the world’s largest democracy and we believe some of the greatest investment opportunities are now in its consumption stocks. Despite gaining independence from Britain in 1947, truly democratic capitalism has only evolved in India in the last decade or so, but is now genuinely embraced. In fact, its economic evolution can be benchmarked to its deviation from its complex licence raj system (the elaborate scheme of licences, regulations and red tape required to establish and operate businesses in force between 1947 and 1990). Economic reforms have also subsequently accelerated in recent years, so much so that the Organization for Economic Cooperation and Development (OECD) projects 2016 economic growth for India at 7.5 per cent following a 7.6 per cent expansion in 20154.
The path to change is led by reform
When India’s Prime Minister, Narendra Modi swept to power in a landslide victory in 2014, he did so with an enormous reform agenda and a promise to revive manufacturing, build infrastructure, streamline tax rules, create new cities with high-speed connectivity, and provide banking services to hundreds of millions of people. While Modi’s failure (to date) to pass major land acquisition and GST legislation has dominated financial press this year, what is not so well publicised is the massive gains he has made through incremental reforms implemented over the last two years. A good example is the financialisation of India’s population – enabling more than 150 million new bank accounts to be opened.
Indian consumers are becoming much more discerning
Indian consumers are now accessing a greater array of shopping options largely due to growing purchasing power and the rising influence of social media. This has led to opportunity for big companies, with MasterCard for example planning to invest $700-800 million in India between now and 20205 while Amazon expects India to become its second-largest overseas market in the next few years, surpassing Japan, Germany and the UK6. And the food ingredients market in India is rapidly expanding amidst increasing consumption of processed foods and a rising preference for ready-to-eat meals. That is predicted to jump to $50 billion by 2017 from $32 billion at the end of 2015, with 79 per cent of households preferring instant food for convenience and capitalising on their rise in income levels7.
Connecting people in the shared economy
Ola Cabs (India’s equivalent of Uber) is another example of changing consumption patterns. Its market share is now estimated to be over 70 per cent and it is beating Uber on key metrics in this rapidly growing market8. Ola now operates in over 100 cities in India, serving over one million requests per day9. Given India’s severely lacking public transport network (there is essentially no public transport outside the four largest cities) and that fewer than three per cent of Indians own a car10, Ola is meeting a basic need. And unlike in the west, where Uber and similar services are facing significant resistance from entrenched interest groups such as taxi drivers and Cabcharge, for the most part these issues don’t exist in India, so Ola is simply creating a whole new market. Ola also operates ride-sharing over a much broader range of services than we experience in Australia. For example, their most basic services involves ride-sharing on the back of a motorbike, or a seat on a mini-bus, while at the other end of the spectrum, Ola customers can book an air-conditioned limousine and driver for several days at a time.
Investing in the Indian summer
Foreign direct investment (FDI) can be seen as a reflection of opportunity, but also of how easy it is to do business in a country. Over the last year, FDI in India has grown over 30 per cent year-on-year with the sub-continent receiving over US$55 billion in 201511 and in particular, India is now emerging as a major investment destination for Chinese and Japanese property developers. What this reveals is that Modi’s reforms have allowed foreign companies to more easily take advantage of the enormous opportunities that this market provides. In India, contrast equals opportunity and it is a market that we believe provides a solid option for Australian investors. With conditions in the wider Australian economy and stagnant business earnings worrying local investors in the domestic market; India provides a great new opportunity to diversify. While the journey might be bumpy and at times congested, we have very high expectations of the investment opportunities in India in the longer term.
1. J Kynge and J Wheatley, ‘Emerging markets: Redrawing the world map’, The Big Read, The Financial Times, viewed 7 June 2016
2. Y Atsmon, P Child, R Dobbs, L Narasimhan, ‘Winning the $30 trillion decathlon: Going for gold in emerging markets’, McKinsey Quarterly, McKinsey & Company, viewed 7 June 2016
3. Atsmon, et al, loc.cit.
4. S Chang, ‘Modi to woo U.S. companies to ramp up investment in India’, Market Watch, viewed 7 June 2016
5. BI intelligence, ‘MasterCard plans to invest $700-800 million in India between now and 2020’, Business insider, viewed 4 July 2016
6. M Chanchani, ‘Amazon invests additional Rs 1,350 crore in its India unit to accelerate growth, The Economic Times, The Times of India, viewed 7 June 2016
7. PTI, ‘Packaged food market to touch $50 billion by 2017: Study’, India Business, The Times of India, viewed 7 June 2016,
8. K Fai Kok, ‘The changing face of cab hailing in India’, Truecaller, viewed 12 July 2016
9. S Satpathy, ‘Ola reaches 1 million trips per day milestone, eyes 3 million trips a day by April 2016’, BGR India, viewed 12 July 2016
10. Government of India Ministry of Road Transport and Highways, programme’ viewed 12 July 2016
11. Morgan Stanley Research, India Equity Strategy Playbook, 21 April 2016