India’s stock market and ETFs were among hottest destinations of 2014. WisdomTree India Earnings ETF (EPI) rallied 28 percent in 2014 while iShares MSCI India (INDA) returned 22 percent. They far outpaced foreign developed markets, which lost -5 percent, and emerging markets, which fell 4 percent. Last year’s gains were driven by a flurry of economic reforms and a crash in oil -- one of its major imports -- which lifted a massive burden on government subsidies. The world’s largest democracy shows no signs of cooling off in 2015. Among a plethora of reasons to be bullish on India, here are my top five.
1. Attractive Valuations
EPI trades at 14 times forward earnings, 2 times book value and 1.1 times sales. It’s more expensive than China and other emerging markets, but is slightly cheaper compared with U.S. and foreign developed markets. The SPDR S&P 500 ETF (SPY) has a price-to-earnings ratio of 17, price-to-book value of 2.5 and price-to-sales of 1.8. iShares MSCI EAFE (EFA) carries a P/E of nearly 15, P/B of 1.6 and P/S of 1. Corporate earnings in India are expected to accelerate and even double over the next few years, which means companies should command higher valuations.
2. Ideal Demographics
More than half of India’s population is younger than 25 and more than 65 percent are below age 35. Demographers project in 2020 the median Indian age will be 29 years, compared with 37 for China and 48 for Japan. A younger population equates to more consumer spending as people form households and raise children and more workers supporting fewer retirees. The older a population, the less consumer spending because they’re past their prime spending years. Already home to 17.5 percent of the world's population, India is projected to be the world's most populous country by 2025 with 1.396 billion people, surpassing China with 1.394 billion.
Not only does India have more buyers but also greater opportunity for market growth for products and services at a time when Western markets are oversaturated. Only 11 people per 1,000 own cars in India compared with 34 per 1,000 in China and 440 per 1,000 in the U.S., as of 2009.
3. Prime Minister Narendra Modi’s Business-Friendly Reforms
Modi’s victory in the May election incited hope that the government would ease environmental restrictions to better compete with China, lighten gold import restrictions and spur infrastructure development. In June, Modi lifted a ban on industrial expansion in 43 areas that the Ministry of Environment and Forests enacted in 2010. Modi appointed a new like-minded environmental minister and stalled industrial projects are being approved quicker.
In November, the government did away with the controversial 80:20 gold import rule, which required that 20% of imported gold be exported before bringing in new gold shipments. Gold imports in November surged to 150 tons -- a fivefold increase year over year.
In late December, Modi issued five urgent ordinances, similar to executive orders, to jumpstart the economy. The biggest one entailed easing land acquisition rules to cut red tape for stalled development projects valued at nearly $300 billion. One ordinance seeks to increase foreign investments in the insurance sector while another would allow private sector participation in coal mining. India’s parliament has to approve the new ordinances at their next session in February before they’ll be enacted.’
Some 311 million Indians live without electricity but the government aims to provide access to all of them by 2017. To achieve that, Modi is calling on the government, which owns 90 percent of the country’s coal reserves but is horribly inefficient, to auction its coal mines to private companies. India is home to the world’s fifth-largest coal reserves.
Power outages cost the country $68 billion in economic output, or 4 percent of GDP in 2013. Any improvement in electricity production would generate a meaningful difference in economic activity.
With a business-friendly regime at the helm, India will attract more foreign investments.
4. The “Make in India” Program
In September, Modi unveiled the “Make in India” campaign to fuel manufacturing and create jobs. The government has pledged to remove entry barriers to business and create a competitive tax scheme to juice manufacturing of low-cost products for both the domestic and foreign markets. The International Monetary Fund forecasts India’s economy will grow by 6.4 percent in 2015 after expanding 5.6 percent last year.
5. Central Bank Easing
The Reserve Bank of India (RBI) shocked global markets this month by lowering the policy interest rate by 0.25 percentage points to 7.75 percent. It was the first rate cut in nearly two years, as lower food and oil prices reduced inflation. Lower interest rates will strengthen corporate balance sheets and encourage business borrowing, especially in interest-rate sensitive sectors like real estate and banking.
Philip J. DeAngelo, is the owner and managing director of Focused Wealth Management, an SEC-registered investment advisor with $420 million in assets under management in Highland, N.Y.