Will India Surpass China over the Next Decade?
Expectations have been high since Prime Minister Narendra Modi took office in May 2014, but what is actually happening in India? Punita Kumar-Sinha, CFA, knows as well as anyone. The founder and managing partner of Pacific Paradigm Advisors and former CIO of Blackstone Asia Advisors has been investing in Indian and emerging markets for more than 25 years. In addition to serving on the boards of select Indian companies, Kumar-Sinha also hosts an annual investment television series on ET Now, one of India’s leading business news channels.
In a wide-ranging discussion with CFA Institute Magazine, Kumar-Sinha explains why she expects India to accelerate ahead of China over the next decade, the progress of economic and financial reforms initiated by the new Indian government, her insights on investing in India, and the challenges facing women in the investment industry.
How fast is the Indian economy growing?
I think this year — or in 2016 — India is going to overtake China in real GDP growth. For the last 10 years or so, China grew at about 9.9%, followed by India at 7% to 7.4%. But I think China is slowing down and India’s growth is picking up. Of the large Asian economies, India probably will be the fastest growing over the next decade. Definitely, India has all the elements necessary to overtake China’s growth in 2015 or 2016.
One ancillary benefit of higher economic and profit growth is going to be significantly enhanced “corporate social responsibility” (CSR) spending since India is one of the few countries that mandates that 2% of corporate profits be spent on CSR projects. These CSR projects are already resulting in many innovative poverty alleviation schemes and would lead to more widespread growth than in the past.
What impact are Indian policy issues having on equity markets?
When the new Modi government came to power in 2014, there was a lot of expectation that things would turn around very quickly. But given India’s deep-rooted problems, nobody can solve these overnight, so patience is required.
In the long run, I think expectations will be met — and hopefully exceeded — because the government is very committed to doing right by the economy. They are undertaking a lot of policy initiatives that are perhaps not being fully noticed. The impact of some of these is going to be felt not immediately but over the medium term.
One is revamping the entire public sector banking system. The banking system, particularly in the banks owned by the government, has a lot of bad loans. So the government is setting up a Bank Board Bureau, and allowing professional management to be appointed — to run the banks like a board-managed company rather than being run by the government itself. That should hopefully address a lot of the issues facing the banking sector.
Another initiative is a national investment fund for infrastructure. The government is going to allocate about $3 billion a year and also raise funds from the private sector, both domestically and globally, to invest in infrastructure. So we could see significant money pouring into infrastructure.
A third one is [conducting] the auctions of national resources in a transparent manner. The government has auctioned off coal resources and telecom spectrum. That gives the government cash and should likely increase transparency for the companies invested in those sectors. Hopefully, the power sector, which has been plagued by problems, will now start seeing more investment because fuel supply agreements are now finally in place and important transmission lines are being built to ensure that the national network is operating.
There are many, many such initiatives. Another is implementing a single nationwide goods and services tax (GST). It’s scheduled for 2016. That will help rationalize a lot of indirect taxation issues for producers. In general, the government is committed to making it easy to do business in India. I think all these reform measures will surely stimulate the economy and improve the performance of the corporate sector as well.
How will doing business in India become easier?
“Ease of Doing Business” is an index created by the World Bank. Countries are ranked from 1 to 189. In 2014, India was ranked at 142 out of 189. Basically, this means when new foreign companies come to India or companies in India set up businesses, there’s so much bureaucracy that things take a very long time.
The new government is trying to improve India’s ranking significantly by reducing bureaucracy and coming up with a single-window clearance for projects (instead of going through many different agencies). For instance, in late April, many government services for entrepreneurs were made available online. The government recently launched a G2B eBiz portal with an objective of eliminating needless procedures and integrating the use of technology. In the long run, several central government services will be integrated on the eBiz platform.
A lot of resources are going into “Ease of Doing Business,” and the prime minister has said that India should be in the top 50. The government wants to develop India’s manufacturing hub, so they really need to make “Ease of Doing Business” much better. When Prime Minister Modi was the chief minister of Gujarat, he brought a lot of investment there. Now, he’s trying to replicate that for the nation.
How are Indian companies priced in your opinion?
From a very short-term perspective, because the earnings growth hasn’t picked up and has perhaps disappointed in some cases, one would say that valuations are just about fair. If you take a long-term view, I think earnings will definitely be picking up over the next year or two (some positive data points are already emerging). So, from that long-term perspective, there is still value in the Indian market.
How can foreign investors best access Indian markets?
Institutional investors can invest directly in Indian stock markets by applying for a license with the regulator, which is not that cumbersome anymore. This is the foreign portfolio investment (FPI) route, which is what most investors prefer to do. If not, they can also invest in ADRs, but those are only a handful of names. To get access, you have to really get the license to invest locally.
Also, anyone can buy Indian mutual funds listed outside of India. Basically, there are many Indian mutual funds available in the US and in London through global firms that are managing these funds for investors in those countries.
How active is the private equity market?
The private equity market with foreign funds is much more active than with Indian domestic funds. Most of the private equity in India is coming from foreign funds that have invested in India as part of their global funds.
If you look at the number of private equity firms investing in India, almost everybody is there: Blackstone, KKR, TPG Capital, Carlyle, all the big names. If you look at the number of domestic Indian firms that are in private equity funds, it’s at a much smaller scale.
Where are the attractive sectors in India?
The financial services sector has all the ingredients to do well in India, especially very favorable demographics: a large, young working population that will need financial products over the long term. Consumer debt levels in India are significantly lower than in other emerging economies. The housing finance market is picking up. The consumer finance market is expected to grow to $1.2 trillion by 2020. Historically, this sector has been growing at 18% CAGR (compound annual growth rate).
Penetration of financial services in India is still low compared with other economies. The government has launched Jan Dhan Yojana — a financial inclusion program by which almost all households in India now have banking accounts available to them. Almost 150 million new bank accounts have been created in the last year, and India has reached 95% banking penetration. The government is going to deliver subsidies and welfare benefits directly into banking accounts. This is going to create — over the long term — a lot of business for the banking sector.
Infrastructure is another theme. India is really behind other countries in its infrastructure. Railways, roads, and power sectors are areas where we are going to see investments. I think infrastructure, over the long run, will be a good theme, but it tends to be more for investors who are direct investors rather than necessarily for stock market investors.
Another area poised to do well is the digital economy. The number of internet users in India has risen quite dramatically to more than 300 million users, which makes it the second-largest internet market (after China). India is developing a fast-growing e-commerce market. The Indian internet industry will see more innovation and activity from venture capital and private equity funds. Some estimate that the size of the internet industry could grow to $137 billion by 2020; therefore, the market capitalization of the Indian internet companies could rise significantly.
In pharmaceuticals and health care, again, we have attractive demographics — increasing health insurance penetration and potential for medical tourism. Estimates suggest that the hospital industry could grow at 11% CAGR to $82.5 billion by 2018. Indian pharmaceutical and health care has been a very good theme, and I think it will continue to be good.
Are the BRICs still relevant? And is India the best of them?
Yes, I think India is the best of the BRICs (Brazil, Russia, India, and China), from a long-term point of view. India has one of the best demographics. I think that really helps. I don’t think “BRICs” is an investment concept so much — it’s more of an economic concept.
From a stock market perspective, I don’t think the BRICs are really an asset class. Emerging markets is an asset class. You can observe that through the number of assets and funds that are linked to the MSCI Emerging Markets Index. It’s significantly larger than the amount of assets that are linked to any kind of MSCI BRIC Index.
The Reserve Bank of India is issuing gold-backed notes. How relevant is this?
I think that will really help. India is one of the biggest importers of gold. This should help reduce some reliance on imports. They’re trying to encourage people to buy gold bonds instead of just importing gold.
Indians love gold. For centuries, gold has been very important in India. Basically, gold is a big asset class in India. People allocate significant amounts of their net worth to gold. People keep gold in their homes or in safe deposit boxes. For most people, the access to gold has been through hard assets, not financial assets. India has about 20,000 tons of gold in private hands and 2,500 tons of gold in major temples. This “idle gold” can be monetized and help India’s trade and current account.
How does India’s savings rate impact the investment environment?
Traditionally, Indians have saved quite a bit. I think the younger population is a little bit more consumer oriented. I wouldn’t be surprised if the saving rate declined as younger people consume more. I think financial assets are becoming more core to people’s portfolios than used to be the case. For instance, in urban India, mutual funds and insurance products are readily accepted. In rural India, [such acceptance is] not so much the case. As I mentioned, most of rural India is putting their savings into hard assets, such as gold and land.
Still, the bulk of the population is not putting their money into equities or even fixed-income mutual funds. In fact, that is largely where rural India is — they’re not as educated on the merit of equities.
Is there potential for growth in equity investing?
Certainly. The volatility of equity markets still scares a lot of people. Basically, I think the Indian equity markets have to get more institutionalized for the rural retail investor to really start feeling comfortable with them as an asset class.
Why did you decide to host a TV show?
I was already on TV quite a bit during my time as the CIO of Blackstone Asia Advisors. I have always wanted to bring more financial literacy to the Indian market by doing a show that brought together global perspectives and policy implications for India. Basically, the goal was to raise the level of the discussion and bring that to audiences in India.
How does hosting a TV show compare with being an investment adviser?
It’s funny — initially, when I started anchoring I thought, “This is much more difficult than being a guest.” When you ask questions to people, you feel like answering them yourself!
Now I find it quite seamless. There is one similarity to being an investment manager: as an anchor and an investment manager, my job is to ask questions. As investors, we ask questions of the companies and managements that we invest in — we are constantly grilling them. I just had to put on that same hat. Then the anchor role became a lot easier. I’m asking tough questions to my guests the same way I do in a conference room or in a one-on-one meeting. The only difference is that in a meeting you can be much more conversational. On screen you have to be much more concise.
I’m very hands-on. I call up the guests, read their research (if they’ve written something, I read the book or articles), and get involved in the editing. My understanding of the subject matter is better because I’ve been in the business. That’s the exact difference that I want to bring to the show — I’m a practitioner and hoping to raise the level of the discussion.
What’s the advantage of being from the markets you invest in?
When I started, there were not many Indians in the industry. Now there are many Indians in the investment industry. I would say that a large number of India funds are now being managed by people of Indian origin. I think that’s true for, say, China funds, that’s true for Japan funds, and we find that the people who have some affinity or association with a region are generally in the position of managing those funds.
Part of the reason, particularly in the emerging markets — and I can comment specifically on India — is that it’s a very relationship-oriented economy. People care a lot about relationships. Therefore if you’re a person who understands that culture, you’re better able to build those relationships. These days in the US, companies don’t do so many one-on-one meetings anymore. But in Asia and in emerging markets they do.
If you have cultural affinity or you understand the culture of the people then you really can understand the drivers of the underlying growth.
Some examples of how this helps?
If you understand Indian consumers, you know what kinds of products they will be looking for. That would enable you to understand which companies might be better positioned.
In India, for example, there’s this concept of paisa vasool, which essentially means that Indian consumers are very cost conscious. They will not spend much. They would prefer to buy small sachets rather than big packets because people don’t like to waste. Companies that have mastered the art of marketing with paisa vasool are better positioned.
You were one of the first Indian investment managers in Boston in 1991. What was that experience like?
I think I probably was the first Indian — or at least one of the first — in the Boston investment management industry. I don’t even think there was another Indian man at that time in the Boston investment management industry. I’m sure there were some in New York but not in Boston.
When I went for meetings, I would definitely get noticed. It helped me create my own position. I got to know a lot of people and people got to know me at that time.
Were there also challenges in that position?
Yes, there were challenges as well. Boston was a somewhat parochial town at that time, and because there was not much ethnic diversity in the firms I initially worked at, people were very curious about me and asked me questions about India, including even asking me whether elephants were still on the streets! There was pressure to fit in. It was also hard to integrate socially, especially for out-of-office informal get-togethers. I even took some courses that could help my effectiveness in American culture.
Looking back 25 years, how much has changed?
The first few firms I worked in had pretty good gender diversity. They didn’t have a lot of ethnic diversity. Now the ethnic diversity piece has really changed. In almost every firm there are lots of Indians and lots of Asians. At the time, I started there were very few firms investing anywhere outside of the US. Even international equities were sort of a new asset class.
We were still trying to get people comfortable with putting 5% to 10% of their portfolios in international equity, let alone in emerging markets. Now those asset classes have really developed. As a result, you have many more people of different ethnic origins working on those teams. Gender diversity may also have improved, but I thought gender diversity even when I started was pretty good.
Do you have advice for women entering the investment profession?
I think it’s probably a lot easier now. A lot more women are coming out of business schools, and many [firms] are hiring women as a result. There’s a much bigger pool of women to hire from. Also, many more women are choosing to enter the investment management business.
I’d say the investment management business has gained in recognition, scale, and size significantly in the last 25 years. I think it’s a great industry for women to work in because it does provide a fairly good work–life balance compared with some other industries. And because results can be easily measured, one’s performance can be judged very objectively.
What’s challenging about being a woman in the investment industry?
One of the challenges I found was on the marketing side. To be able to market well, you have to be able to build relationships with people. It becomes a little bit harder as a woman to build those relationships with your investors.
I’ll tell you why it’s hard. People generally give money to people they trust. Trust doesn’t build in one meeting or two meetings. Trust is built over a long period of time. A lot of that trust comes from people you meet socially, outside of work. For instance, people are buddies on the golf course or play some sport together or studied together or lived in the same dorm. Those kinds of relationships are quite important when you’re marketing. These types of networks are not so easy for women to develop — particularly if you have grown up in another country or another culture. This makes it harder to be an effective fund-raiser. That’s where I think women find it challenging.
What was your access point? How would you meet people socially?
I didn’t, or not much at least. That’s why I said that my male counterparts (most of my male counterparts who had grown up in the US) obviously had better access and more extensive networks and probably did a lot better than me in terms of marketing.
Nathan Jaye, CFA, is a speaker on intelligence and member of CFA Society San Francisco. This article originally ran in the July/August 2015 issue of CFA Institute Magazine.
If you liked this post, don’t forget to subscribe to the Enterprising Investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.