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Heartwood Investment Management has declared that  India is its top EM pick. Jaisal Pastakia, Investment Manager at Heartwood, identifies the following key factors:

  • Investment opportunities in domestically-focussed companies, fuelled by wide-ranging reforms
  • Positive growth of the working age population, which bodes well for lifting future productivity rates and boosting consumption

Heartwood says that India has a big demographic story, which is among the reasons why it stands out for them, and why it is the largest single country overweight within their emerging markets (EM) equity allocation. Globally, India is one of the few large economies where working age population growth is still positive; you might say that this is its ‘demographic dividend’. With a growing and aspirational middle class, this bodes well for lifting future productivity rates and boosting consumption says Heartwood. Because of this, some estimates suggest that India’s nominal gross domestic product growth could double by the next decade.

Another compelling reason for their positive stance on India – and in their analysis this carries even more weight than the demographic advantage – is the pace of reform. Stronger and higher quality growth will only be secured through meaningful structural reform to India’s economy. In this regard, they believe that Prime Minister Narendra Modi’s reform agenda outpaces other EM countries. It therefore looks like any bank looking to source banking technology in India is looking at a stronger set of regional players.

Investment opportunities in domestically-focussed companies

Brazil, for example, remains a constant source of frustration for investors due to a troubled political scene. Elsewhere, South Korea and China are making headway with implementing reforms, but the longer-term positive impacts remain to be seen. India is more advanced in its reform cycle claims Heartwood and, having come through some short-term disruption, is now starting to bear the fruits of Prime Minister Modi’s reform agenda, with increased efficiencies and demand. Heartwood thinks that this creates interesting opportunities for investors, particularly at the domestic level, and are therefore focusing on the medium-sized company sector which is more domestically exposed.

The government has implemented wide-ranging reforms (fiscal, land, labour market and transport), which are helping to formalise the economy. One of the most impactful measures has been the Goods and Services Tax, which was introduced in July 2017. The tax effectively creates a pan-Indian common market through the harmonisation of state and central government taxes. Changes to the tax regime are expected to lead to a meaningful pick-up in growth, as well as efficiency gains in areas like logistics. Elsewhere, reforms to promote greater financial inclusion have meant that over 300 million new bank accounts have been opened and over 229 million debit cards have been issued. After a period of economic disruption in the middle of 2017, activity data has now improved with industrial production output, credit flows and car sales seeing strong improvements in recent months.

by Bill Boyle
IBS Intelligence Senior Editor