JPMorgan Indian Investment Trust (JII) has announced its annual results for the year ended September 30 2023. NAV total return for the year was 1.2%, marginally ahead of the benchmark return of 0.7%. Share price total return was 2.2% with the discount closing at around 18%. The manager noted that It was a year of two halves in India, the first half weak and the second half catching up strongly.
In the opinion of JII, two factors contributed to weakness in the Indian market during the first half. One was China’s sudden decision to abandon its zero covid policy, which presented investors with another investment destination for capital. The other factor was a short seller report on the Adani Group companies, which triggered concerns regarding the overall Indian market. In contrast, the second half of the year saw a strong rebound, driven by a buoyant domestic economy led by capital formation on the back of government investment in infrastructure and a revival in capex. To a lesser extent, the markets were helped by investor disappointment when China’s economic recovery lost momentum.
Discussing the performance and the broader economic outlook, the managers added the following:
Over the last 12 months, the investment case for India has become a lot more credible, for several reasons. India’s growth catalysts are multiplying and broadening, and the country is set to become the world’s fourth largest economy in 2025.
Capex spending and economic reforms are transforming the economy
Perhaps the most compelling aspect of India’s transformation is the rapid growth in capital spending, which will also help balance the mix of GDP, which is currently skewed to services, more into manufacturing. As we noted in our last report, India has under-invested in capital formation over the last decade, but both the government and the private sector have now realised that capex is essential if the country is to achieve its target of 6% GDP growth over the next decade. The government has prioritised capex spending accordingly – almost doubling capital expenditure as a percentage of budget from 12% in the last decade, to 22% currently – and progress has been remarkable. Highway construction has grown by nearly 60% in the last nine years, from an already high base. Additionally, rail investments have increased more than fourfold in the last six years, port capacity has climbed by more than 80%, reducing turnaround times, and the country boasts 73 new airports. Metro rail has risen three and a half times, with more cities now benefiting from metro services.
The government has also implemented economic reforms to put the private sector on a solid footing. It has formalised the industrial sector by introducing a nationwide goods and services tax, reduced the corporate tax rate, lowered real lending rates, and introduced subsidies to incentivise domestic manufacturing. These measures, combined with buoyant demand, have improved the financial health of private companies, which are now at peak profitability and have sufficient firepower to fund investment without depending too much on external financing.
The government’s encouragement of domestic manufacturing is paying off. Companies are improving their cost competitiveness by upgrading existing facilities, stepping up automation and electrification, and switching to renewable energy. These efforts have reduced the cyclicality in earnings inherent in the manufacturing sector, and India is now winning new business, replacing China in parts of the global supply chain, as multinational companies seek to diversify and secure supply in the wake of recent geopolitical events.
The Company’s portfolio has exposure to these dramatic changes via investments in businesses such as Ultratech Cement, Tube Investments, Kajaria Ceramics, Triveni Turbines, Supreme Industries and Power Grid.
The Demographic Dividend is driving domestic consumption
India has recently overtaken China as the most populous country in the world and the age distribution is weighted towards more working age groups. This growing working age population, and the associated rise in incomes, should continue to fuel the growth in India’s middle class and underpin and sustain consumption spending and housing demand for decades.
Our portfolio is set to benefit from rising consumer demand via positions in personal and household products suppliers Colgate India and Hindustan Unilever, packaged foods supplier, Britannia industries, drinks company United Spirits, and auto makers Bajaj Auto, Eicher Motors and Maruti Suzuki.
Financial inclusion and digitalisation are increasing access to many services. The value of money transferred though India’s instant real-time digital payment system through mobiles, UPI (Unified Payment Interface), has exploded from roughly $110bn or 3% of GDP in 2019 to $1trn or 19% of GDP in 2022.
Government efforts to increase financial inclusion have been very successful in ensuring Indian consumers have greater access to banking and financial services. The number of individuals with bank accounts has increased from 35% of the population in 2011, to over 77% by 2021, thanks to the Jan Dhan scheme designed to provide citizens with basic bank accounts, deposits and other financial services. Around 500 million Jan Dhan accounts have been opened since 2014, dramatically improving access to government benefits payments and simplifying everyday transactions for hundreds of millions of people.
These developments have coincided with the trend towards digital empowerment – another Indian success story which has drastically transformed the digital landscape in the past decade. The number of internet users in the country more than tripled from c240 million in 2014 to 759 million in 2022 – reaching a penetration level of 52% of the population. Moreover, the lead has come from rural areas, which now have more internet users than cities (399 million vs 360 million). Additionally, over 190,000 village panchayats, usually elderly and respected community leaders, now have optical fibre connections, compared to only 60 in 2014. This enhanced connectivity has increased consumers’ access to e-commerce, online banking and other fintech services.
But this is just the beginning. The potential for future growth in both financial and digital services is massive. As just a couple of examples, the percentage of the population that owns a credit card is still less than 5%, and the spend per capita on insurance is less than $100. This compares to the UK, where credit card ownership is 80% and insurance spending per capita is approximately £4,000.
The Company’s portfolio has access to these trends through its positions in HDFC Bank, ICICI, Axis Bank, HDFC Life and HDFC Asset Management. The change in our holding in HDFC Bank appears significant due to the merger of HDFC Bank and HDFC Ltd this year. Given both these businesses were core holdings for us prior to the merger, there has been no increase in our underlying exposure.
Politics
Lastly, given the proximity of India’s next general election, which is expected by May 2024, it would be remiss of us not to mention this event, at least briefly, if only to relay our view that whatever the result, it will have limited implications for long term investors. Our view is based on several considerations. First, we expect successive governments of whatever ilk to carry on the reform process, which will ensure the country continues to attract long-term capital. Furthermore, the government’s share of GDP of 12.7% isn’t that large. The Indian economy is driven more by individuals and private enterprise than government spending. Lastly, Indian corporates have long experience in dealing with the country’s chaotic political governance.
Valuations
India’s huge growth potential has been, and will continue to be, reflected in market returns. We are often asked about market valuations and whether we think the India equity market is expensive. As we noted in the half year report, part of the answer to this question lies with investors’ time horizon. But also, more fundamentally, according to the theoretical framework which we use to analyse and value individual stocks, the key components that drive the value of any business, or by extension, the entire market, are its return on equity (ROE) and its growth rate. The Indian equity market has consistently delivered an attractive combination of a high, and relatively stable, average ROE, coupled with high long-term growth. This provides ample justification for higher long-term multiples, and we do not view market valuations as out of sync with the long-term opportunity.
When considering valuations, it is also important to note that India offers investors significant diversification benefits, as the market has low correlations with the rest of world – 0.4 to China and 0.6 to the MSCI World. This should reduce portfolio volatility in unsettled times.
Summary
As we look forward, we see a lot to be very positive about on the long-term opportunity for the Indian market. While the economy has averaged a real GDP growth rate of around 6% for 3 decades, this has also translated into strong equity market returns. This doesn’t hold true for many markets around the world, and we would say over that period the political shifts that have happened have not stood in the way of that outcome. While we would never rule out market volatility driven by political events, we would also expect that, as in the past, these would not change the outcome of economic growth.
In our opinion, we now have the backdrop where all the stars have aligned and we can look forward to probably the most attractive decade ahead. We have spoken plenty about the demographic dividend and the opportunity that brings; the impact of financial inclusion and the access to every part of the Indian market; and now a capex cycle which has been dormant for a decade. The combination of all these things provides a powerful tailwind to the Indian equity market for the foreseeable future.
Quiet year for JPMorgan Indian despite outperformance