India - Prepared For Takeoff
Authored by Dina Ting, a certified financial analyst and the leader of Global Index Portfolio Management at Franklin Templeton ETFs.
Apart from the rising population, there are other favorable factors that are paving the way for India's economy and markets to soar. Dina Ting, the Head of Global Index Portfolio Management at Franklin Templeton, talks about the government's beneficial initiatives and the robust financial, IT, and energy sectors in the country.
Nowadays, the majority of individuals are familiar with the forecast stating that India has already - or is on the verge of - surpassing all other nations in terms of population. Its expansion is outpacing that of China, which has held the title of the world's most populated country since the United Nations started recording population data in 1950.
However, it's not just the population that is increasing rapidly in India. The rising middle class also contributes to a stronger demand for travel, resulting in the country's aviation industry and market experiencing significant growth. In fact, India's aviation sector is now one of the quickest expanding in the world. Experts predict that the government will invest around $12 billion by 2025 to enhance regional connectivity, which involves upgrading current facilities and constructing 80 new airports in the next five years.
In June of this year, Air India, a company under the ownership of Tata, who currently holds the position of the largest international carrier in the country, made an important and groundbreaking purchase of 470 passenger airplanes from the renowned manufacturers Boeing and Airbus. It is worth noting that within the domestic market, Air India faces competition from the IndiGo discount airline.
In the same month, US President Joe Biden invited Indian Prime Minister Narendra Modi for a special visit to Washington. During this visit, he commended the remarkable US$46 billion purchase of Boeing aircraft, stating that it held immense significance. Biden mentioned that this order was the second largest in Boeing's history. Lately, both nations have been forging stronger ties in various sectors, such as defense manufacturing and technological advancement.
We think that this is a great moment to focus more on India and the exchange-traded funds that can give investors a cost-effective and tax-efficient option for making strategic investments in the country.
For individuals looking to gain a comprehensive understanding of the Indian economy, it is important to consider that the stock market, as indicated by the FTSE India RIC Capped Index, showed a growth of over 13% during the second quarter of 2023. This positive growth occurred despite the market's slow beginning earlier in the year.
The index is slanted towards investments in the financial sector, which accounts for 21% of the overall weightage. The following two biggest sectors are information technology and energy, each weighing in at approximately 12.5%.
India's impressive anticipated growth in the previous year distinguished it as a leading contender because of its capacity to venture into more intricate sectors. Notably, the nation witnessed a rise in its position on the World Intellectual Property Organization's Global Innovation Index (GII) for 2022, soaring from 46th place to 40th out of a total of 132 economies.
India's Ministry of Science and Technology states that the nation is also recognized for having the world's third-largest technology startup environment, along with higher levels of funding and investment aid.
India's financial sector experienced positive growth last quarter due to a consistent expansion in the economy. Additionally, the Indian market saw a boost in July with the merger of Housing Development Finance Corporation and HDFC Bank, the country's primary mortgage lender, resulting in a mega-merger worth US$40 billion. This merger caused a rally in the Indian market, and the combined entity now holds a market capitalization estimated at around US$150 billion, making it the fourth largest bank globally.
The Indian administration has ambitions to revamp its state-run schooling system but still has a significant journey ahead. As per the World Bank's information, the current expenditure on India's education system stands at approximately 4.5% of the country's total economic output, failing to meet Modi's commitment of 6% of GDP. Although there has been a slight increase in enrollment numbers, the majority of Indian youngsters continue to lack fundamental reading and arithmetic abilities.
Sometimes, though, businesses might intervene to support the demands of higher education, particularly in the competitive growth of back-office processing (BPO) and advanced manufacturing industries.
A couple of years back, academic institutions in Taiwan collaboratively started a project with Indian conglomerate Tata to provide electronics courses to its employees. If India manages to increase its pool of skilled workers, it might attract more manufacturing activities from other parts of Asia, such as China, which has comparatively higher minimum wages and workers who now expect greater compensation.
Additionally, the implementation of the nation's goods and services tax (GST) and the increasing digitalization of the economy are purportedly attracting a larger population to join the formal economy.
In May, Modi expressed the triumph of the GST in a post on social media, stating: "Positive developments for the Indian economy. Despite reduced tax rates, the increase in tax collection demonstrates the effectiveness of GST in enhancing unity and adherence."
Over ten years ago, India initiated the establishment of a stronger base for a digital economy by introducing its national identification program, Aadhaar. This program utilizes biometric IDs to verify individuals' residential proof. As a result, numerous social advantages have been achieved, and it has played a crucial role in promoting the inclusion of digital finance.
Certainly, creating new jobs continues to be a difficult task, however, there has been a notable increase in the demand within the country. Furthermore, Indian individuals are expected to have higher levels of expendable income, and with the changing income distribution, it is possible that overall consumption will experience significant growth. According to research conducted by Goldman Sachs, it is estimated that India's GDP will surpass that of the euro area by 2051 and the United States by 2075.10
In addition to significant development of infrastructure, expansion of the financial sector, and a large and varied population, India's impressive advancement in shifting towards renewable energy is also an attractive factor for potential investors.
The World Bank has recently granted financial support of $1.5 billion to expedite the progression of India's eco-friendly energy industry. Furthermore, the International Energy Agency predicts that India will outstrip Canada and China, securing its place as the third-largest ethanol market globally (following the United States and Brazil).
What Are The Dangers?
Every kind of investment carries risks, including the potential for losing the initial investment amount.
Stocks can go up and down in value, and there is a risk of losing the initial investment.
Investing globally comes with unique challenges, such as the possibility of currency values changing and uncertainties related to social, economic, and political factors. These factors could result in higher levels of fluctuation in investment returns. The risks become even more pronounced when investing in emerging markets.
Exchange-traded funds (ETFs) operate similarly to stocks and can experience changes in their market value, trading both above and below the ETF's net asset value. Keep in mind that the costs of brokerage commissions and ETF expenses will lower your returns. ETF shares can be bought or sold at any time throughout the day at the market price on the specific exchange where they are listed. However, there is no guarantee that there will always be an active trading market for ETF shares, and their listing may change. It's important to note that while ETF shares can be traded on secondary markets, they may not always be easily tradable in all market conditions and may even be discounted during times of market stress.
Investing in ETFs might come with commissions, management fees, brokerage fees, and other expenses. Before making any investment, make sure to carefully read the prospectus and ETF facts. Keep in mind that ETFs are not guaranteed, their values are subject to frequent changes, and past performance is not necessarily indicative of future results.
This blog section includes examples of companies and case studies, but please note that these are only provided for illustration purposes. The investments mentioned may or may not be currently held in any of Franklin Templeton's advised portfolios. The information shared here is not personalized investment advice or a recommendation for any specific security, strategy, or investment product. It also does not reflect the trading intentions of any portfolio managed by Franklin Templeton.
2. Information gathered from Bloomberg as of June 30, 2023 reveals that the FTSE India RIC Capped Index showcases the achievements of large and mid-level Indian stocks. The index assigns weights to securities based on their market capitalization, considering the free float adjustment. These weights are reviewed twice a year. It's important to note that indexes cannot be directly invested in, as they are not managed and don't include fees or charges. The past performance of the index should not be used as a guarantee for future outcomes. For more data provider details, please visit www.franklintempletondatasources.com.
4. Reference: The World Intellectual Property Organization, "Global Innovation Index 2022: Envisioning the Prospects of Growth Driven by Innovation," 2022.
According to a statement by Dr. Jitendra Singh from the Department of Science & Technology, India has secured the 3rd position worldwide in the Start-Up ecosystem. Additionally, India is also ranked 3rd in terms of the number of Unicorns. This information was released on August 16, 2022.
Source: CNBC reports that HDFC Bank in India has successfully acquired the biggest mortgage lender in the country, amounting to a $40 billion takeover. Here's the significance of this development, according to the article published on July 2, 2023.
Information provided by The World Bank on October 24, 2022 shows government spending on education as a percentage of GDP.
According to an article from SASTRA titled "SASTRA collaborates with TATA Electronics in an Indo Taiwan partnership," dated July 5, 2021.
Title: International Companies Exploring Asian Alternatives as Substitute for Chinese Manufacturing Recently published by The Economist on February 20, 2023, a report highlights the growing interest of global enterprises in exploring manufacturing alternatives across Asian countries in lieu of China.
Source: Goldman Sachs, "The World Economy in 2075: Declining Growth as Asia Emerges," December 8, 2022.
Source: The World Bank has given the green light to provide $1.5 billion in funding to aid India in its shift towards a low-carbon future, as stated in their announcement on June 29, 2023.
12. Origin: International Energy Agency, “Renewables 2021: Evaluation and projections till 2026,” December 2021.
Author's Note: The concise points for this blog post were selected by the editors at Seeking Alpha.
Written by the author of this blog
Franklin Resources, Inc., also known as Franklin Templeton Investments, is a worldwide investment management company. They offer investment solutions managed by their various teams, including Franklin, Templeton, Mutual Series, Bissett, Fiduciary Trust, Darby, Balanced Equity Management, and K2. Based in San Mateo, California, the company has been in the investment business for over 65 years and currently manages over $908 billion worth of assets as of May 31, 2014. If you want to know more, you can contact them at 1-800/DIAL BEN® or visit their website at franklinresources.com.
