Foreign investing in India: trends, opportunities and forecasts

1. How do you assess India’s economy, considering GDP growth, inflation, employment, and fiscal policy? How will these factors shape India's economic future?

Mr. Shiv Sehgal, President & Head of Nuvama Capital Markets

India today is in a sweet spot when seen from both growth as well as macro-economic stability. First, with regards to growth, what catches headlines is the real GDP growth – which is certainly one of the highest in the world. However, what is underappreciated is the quality of the same. It is driven by government-led infrastructure investment and real estate development, which have high growth multipliers compared to the consumption-led growth seen in 2000s.

 It is because of these factors that despite buoyant growth there is low inflation as its productivity led. Such a combination is likely to continue for many years as India has just started on the investment front, balance sheets are strong and there is focus on productivity by both the government and the private sector.

Mr. Ankit Jain, Senior Fund Manager of Mirae Asset Investment Managers India Private Limited

India’s GDP growth has been projected to grow at 6.6% in FY26 by the World Bank, which makes it the fastest-growing major economy in the world. The inflation has been kept under control thanks to the coordinated focus of the monetary and fiscal policy in the last 7-8 years. The fiscal deficit has been budgeted to narrow to 4.5% of GDP by FY26, down from 5.8% in FY24. With a GDP of $3.7 trillion, India currently ranks as the 5th largest economy in the world and it is expected to be the 3rd largest economy by 2028 as per the International Monetary Fund (IMF) estimate. With an expected growth rate of 6-7%, India is estimated to lead the global growth in the next 5-10 years.

Figure 1: India to lead global growth in the next five to 10 years - Source IMF

2.  How do you perceive India's competitiveness as an investment hub compared to other key Asian and developing markets?

Shiv Sehgal

It’s fascinating how things have changed in last decade. India was famously part of the “fragile five,” a decade ago. Today, it’s an investor darling and one of the few beacons of growth. Similarly, with regards to markets India used to be clubbed along with (Ems)today people perceive it quite differently.

India is balancing capacity building and inclusive development. Economic reforms ranging from Goods and Services Tax (GST), bankruptcy code, ease of doing business combined with sustained push toward capex through Production Linked Incentive (PLI) schemes, are working to expand India’s potential growth rate. At the same time, a social revolution of sorts is unfolding at the ground level with expanding reach of electricity and cooking gas, free food, direct benefit transfers, affordable housing and many more all of which add up to a social safety net for the lower income brackets.

Such a comprehensive development has not been seen before. India is still in the lower part of the S-curve, with a long journey still ahead. Today, the world is going through what many experts’ terms as “Polycrisis” – as there are geopolitical tensions, high debt, weakening US hegemony, ageing population, and policy uncertainty. In such an environment India stands out. With its young population, low debt, and (one of the few countries to have de-levered over last decade), clear policy direction, it’s becoming a popular destination compared to both EM as well as other developing markets.

Ankit Jain

India's competitive position as an investment hub has improved massively due to its faster growth compared to other developing economies in Asia. India's position as an investment hub is promising. It’s large domestic consumption market, economic growth potential, and government reforms are significant advantages. The country’s rankings on various competitiveness indexes, are improving (e.g. World Bank Logistics Performance Index, Global Innovation Index).

Figure 2: India’s share in world GDP is on the rise - Source IMF

3. What market shifts are driving more funds into Indian markets ,and what is the primary catalyst for these changes?

Shiv Sehgal

Well, most investors are familiar with the long-term rationale for investing in Indian equity markets (Ems) — demographics, a growing middle class, and digitalization. While these are certainly valid points, there are other compelling reasons to consider a distinct investment into Indian markets.

India is one of few emerging markets (Ems) where equity investors get rewarded for underlying economic growth. In other words, company earnings, (and thus the index) tend to grow in line with GDP. This sounds logical and somewhat basic, but most investors would be surprised to learn that this is not the case for a large swath of emerging markets, where earnings have not grown in line with underlying GDP. There are several potential reasons why this could be the case, including weak corporate governance, share dilution, index composition, or simply an overstatement of actual GDP growth.

What this means is that investors in emerging markets – many of whom invest for the high growth prospects – are not being rewarded for that growth. The benefits of economic growth, even if being felt by companies through higher revenues, are not accruing to shareholders. 

India’s EM, represented by Morgan Stanley Capital International (MSCI) India, stands out as an interesting example within EM. Corporate earnings at the index level have closely tracked India’s nominal GDP growth over the last 20 years. Over most relevant investment time frames, the Indian equity market (MSCI India) is amongst the most consistent and best performing global indices. An equally surprising factor to most investors is that these impressive equity returns have largely been driven by a long track record of relatively consistent compounded earnings. In fact, the 20-year compounded average growth rate (CAGR) for MSCI India earnings is 10.9%, which matches the 20-year annualized equity return of 14.9% (in local currency) for the equity market.

Ankit Jain

India has political stability as the current regime completes 10 years in office. Political stability is expected to continue beyond 2024 as Prime Minister Narendra Modi’s approval rating remains high. The government has focused on building infrastructure in the last 9 years. Government capex jumped from $40 billion in FY20 to $130 billion in FY25. National Highway network has improved from 91,000 km in 2014 to 147,000 km. The focus is to remove the infrastructure bottlenecks to pave the path for faster growth. The other reason for foreign flows is the healthy domestic flows into EMs. FPIs come to invest in a country where domestic flows are strong. Domestic mutual fund (MF) industry Assets Under Management (AUM) grew by about 4 times in the past 7 years. These are the main reasons why FPIs are positive on Indian economy.

4. Which sectors do you expect to thrive over the next decade, and why?

Shiv Sehgal

I think the investment opportunities in India, for the long term, are big. India is one of the markets where, during sell-offs, you can keep buying and gradually build your investments over time. In the US, just 16% of personal financial assets are in cash or savings accounts, while Indians still hold more than 60% of their wealth in the form of cash or savings account. This is our opportunity to drive savings into capital markets. There seems to be a domestic equity cult developing, with domestic MF growing 10 times more in the last 10 years. This is similar to the post-1980s US, where combination of demography and deregulation spurred strong retail investor interest. The trend that started in 2016 is not an anomaly but a structural change and we need to give it the importance it deserves.

Sectorally, during phases of upswing, cyclical sectors tend to see both earnings, as well as valuation tailwinds. Given that we are at the early stages of the cycle, one should have a bias toward domestic cyclicals, such as banks, industrials, real estate, and cars.

Ankit Jain

We see good investment opportunities across three key areas:

• Domestic growth potential: India currently boasts the fastest-growing economy globally, with a GDP of $3.5 trillion and projections to become the fifth-largest economy soon. Real GDP is anticipated to grow at 7%, with nominal GDP growth at 11%, indicating a potential doubling of the economy within 6.5-7 years. With all four balance sheets — banking, housing, government, and corporate —  in good shape, the growing economy presents numerous opportunities in mid-cap companies. The government's targets to increase income levels, combined with favorable demographics for a long time (median age of 28 years) and policies aimed at boosting the workforce, contribute to long-term growth prospects. Given these factors, we perceive significant opportunities in the consumer and financial services sectors.
• Manufacturing potential: The manufacturing sector currently constituting 14% of GDP and India's share of exports is low. Initiatives like "China+1" and localization efforts are expected to drive manufacturing growth. Investments in logistics to reduce costs — coupled with government measures to lower interest rates — aim to enhance the competitiveness of the manufacturing sector. India is poised to offer a competitive advantage in manufacturing for the next two decades, with incentives provided to both domestic and foreign companies.
• Economy formalization: Reforms aimed at formalizing the economy have been instrumental in benefiting mid-cap and smaller companies. These reforms have created a conducive environment for businesses, leading to increased opportunities and growth potential within the mid-cap segment. We are positive about the building material, logistics, and real estate sectors to benefit from this trend.

5. Which recent trends have led to the growth of the asset management industry in India?

Shiv Sehgal

If one has to look at India’s financial evolution, post-1980s US offers the best template. In the US, the combination of financial de-regulation, young population, and improved macro-stability (after stagflation of 1970s) spurred a big rise in equity cult. The US equity MF AUM rose 100 times in 20 years, and equity MF AUM as a percentage of bank deposits rose from 3% to 60% between 1980 to 2000. India today is at a similar cusp, with equity cult just started. While equity MF AUMs have risen by 10 times over the last decade, there is still a long way to go. Even after such a stupendous rise, its share of bank deposits is just 15%. Thus, progress is likely to continue as incomes and aspirations of India’s incomes rise.

Ankit Jain

• Increase in the contribution of Systematic Investment Plan (SIP) has made asset management company (AMC) business relatively sticky (SIP AUM as a percentage of equity AUM has gone up from 25.7% in March 2019 to 46.6% in March 2024);
• High net-worth individuals (HNI) contribution is leading to strong growth in AMC especially equity AUM; and,
• With increase in the popularity of direct (gone up from 16.2% in FY19 to 25.8% in FY24) and its cost effectiveness also contributed to growth.

6. What key factors guide your investment decisions in the Indian market? Can you elaborate on your investment thesis and rationale?

Shiv Sehgal

While investing in India, it’s important to have a couple of things in mind. One must focus on not just getting macro themes like capex or consumption, but also micro themes within it right. Second, in lot of industries earnings prospects are being shaped by competitive intensity rather than just demand dynamics, which is a –key variable that needs to be kept in mind. Typically, I like to buy into growth stories rather than focusing on value. In India, growth gets a hefty premium, so even if you buy something expensive but fast-growing, you are likely to generate good returns.

Ankit Jain

We prioritize maintaining a well-diversified portfolio and consciously avoid heavy sector allocations. Our portfolio takes reference from the mid-cap 100 index as a benchmark, aligning its sector allocation while emphasizing active stock weights. This approach highlights our dedication to stock selection, which is underscored by our confidence in our stock-picking abilities. Our stock selection process follows a growth at a Reasonable Price (GARP) philosophy, considering:

• Business selection: We seek companies that have demonstrated double-digit growth over a reasonable period.
• RoCE: Our preference is for companies with a pre-tax Return on Capital Employed (RoCE) exceeding 15%.
• Management: Strong management with thought leadership is a crucial factor in our decision-making.

Our stock selection decisions reflect our value assessment, underpinned by rigorous primary research, especially within the mid-cap and small-cap segments.

Given India's status as a growth market, our portfolio leans significantly toward growth businesses, accounting for approximately about 70%-75% of our investments, while the remaining is allocated to value businesses. This strategic diversification approach aims to deliver risk-adjusted returns to our investors.

Our is a 15-member team comprises sector specialists who contribute to generating investment ideas. We place substantial emphasis on in-house ideation. Further, our analysis places significant weight on the Discounted Cash Flow (DCF) methodology.

7. As an asset manager in India, what transformations do you anticipate in the investment landscape ahead?

Shiv Sehgal

As markets evolve, many transformations are likely to occur. As we go ahead, I think the role of technology in asset markets will rise, as will the scope for financial innovation. Today in India, despite the boom in asset management over last decade, most financial products are either linked to equity or debt. There has been rise in structured products, but it’s nowhere close to that seen in western world. This is one space where things could evolve going ahead.

Ankit Jain

• Financialization of household savings;
• Increase in direct participation in EM either Cash Market or derivatives; and,
• Strong growth in dematerialized (demat) account opening (151 million in FY24 Vs 36 million in 2019) suggest sustained participation of retail players in the market.

8. How do you foresee the growth of foreign investments in India through alternate spaces? (Alternative investment funds (AIFs), real estate investment trust (REITs), Infrastructure Investment Trust (InVITs))

Shiv Sehgal

You know, when it comes to foreign investments in India, things have really evolved. Recent regulatory changes have opened exciting opportunities for foreign investors. We’re talking about AIFs, REITs, and InvITs. These aren’t your typical stocks and bonds; they offer exposure to different kinds of assets. AIFs are privately pooled funds that invest in infrastructure, hedge funds, private equity, and venture capital.

AIFs in India have come of age and experienced an annual growth rate of 30% in FY23. According to recent trends, AIFs are getting a lot of attention. By the end of March 2023, AIFs had committed a total of approximately US$100 billion, had a corpus of around US$44 billion, and had invested a total of about US$40 billion, according to cumulative data compiled by the market regulator Securities and Exchange Board of India (SEBI). Corresponding to annual growth rates of 30%, 16.49%, and 19% respectively. According to the Indian Association of Alternative Investment Funds (IAAIF), the AIF industry managed assets worth a total of approximately US$84.3 billion.

Now, here’s the interesting part: REITs and InvITs collectively raised ₹11,474 crore in 2023. That’s a clear sign of investor confidence. And why are these investment vehicles so appealing? Well, it’s all about transparency, favorable tax structures, and ongoing reforms.

AIFs have gained prominence, especially when it comes to attracting foreign capital. Regulated by SEBI, AIFs offer exposure to assets beyond the conventional stock and bond markets. Their strategic significance lies in fostering economic development by supporting sectors like startups, real estate, and distressed assets. Thus, for foreign investors seeking growth avenues, AIFs are increasingly compelling choices.

Therefore, if you’re a foreign investor looking for growth avenues, keep an eye on AIFs, REITs, and InvITs. They’re shaping India’s investment landscape in exciting ways.

9. Given the surge in investment activity, particularly in the Alternate Investment sector, SEBI has been closely monitored Indian managers. Do foreign investors encounter significant challenges in India?

Shiv Sehgal

Undoubtedly, navigating the Indian investment landscape, particularly in the alternative investment sector, presents its fair share of challenges for foreign investors. Firstly, regulatory compliance can be complex and time-consuming, as SEBI imposes stringent regulations, however this is primarily to safeguard investor interests. Furthermore, market volatility and geopolitical uncertainties require a keen understanding and proactive risk management approach.

Despite these challenges, the potential for high returns and diversification benefits makes India an attractive investment destination worth exploring. Indeed, India's vibrant market offers substantial growth opportunities, with the alternative investment sector witnessing a remarkable surge in recent years.

10. Do you anticipate a rising prevalence of passive fund management in India, or do you expect greater demand for active management of funds?

Shiv Sehgal

The eternal tug-of-war between active and passive fund management. Let’s break it down. Globally, passive funds have been on the rise. They’ve snagged around 31% of mutual fund assets worldwide, and in the US, they’re at a whopping 40%. India’s no exception — our passive funds have surged nearly fivefold in the last five years, thanks to institutional players like provident fund trusts.

But here’s the twist: actively managed funds have been under the microscope lately. Many haven’t quite outpaced the market benchmarks. Now, will this recent underperformance push folks toward passive funds? Well, that’s the million-dollar question. And spare a thought for our distributor community — they’re already grappling with declining expense ratios.

In a nutshell, it’s a fascinating run. Active or passive, the answer lies in the stars — or maybe just in the next market cycle.

Ankit Jain

Large of exchange-traded fund (ETF) AUM growth ins driven by Employees Provident Fund Organization (EPFO) participation of EM. However, retail and HNI investors who drive equity AUM for MFs still participate in active equity. Yet, new MFs, such as Zerodha, Angel etc. want to create products around to ETF to grow their MF stories. Given the reach of these brokers, we expect small-ticket investments to pick up.

11. How do you envision sustainability influencing the asset management environment when making investments in India?

Shiv Sehgal

Sustainability is rapidly becoming a focal point in the asset management landscape, particularly in India. Consider this: ESG (Environmental, Social, and Governance) investing has seen a surge of over 34% globally, totaling $35.3 trillion in assets. In India alone, sustainable assets have more than doubled in the last three years, reaching $1.7 trillion.

Now, with the Indian government pushing ambitious sustainability agendas and investors increasingly prioritizing responsible investing, sustainability considerations are permeating investment decisions. From renewable energy projects to green bonds and socially responsible initiatives, sustainable investments are not just a trend, but a crucial aspect of long-term wealth creation and societal impact.

12. How will artificial intelligence (AI) shape asset management’s future, and which strategies or technologies do you believe will drive innovation and efficiency in the industry?

Shiv Sehgal

AI is poised to revolutionize asset management, offering unparalleled opportunities for innovation and efficiency. Globally, AI adoption in financial services is projected to grow by 23.9% annually, reaching $37 billion by 2027. In India, AI-driven fintech investments have surged to $2 billion, with a staggering 33% year-on-year growth rate.

Looking ahead, AI-powered algorithms for predictive analytics, machine learning-driven portfolio optimization, and natural language processing for sentiment analysis are expected to be game-changers. These technologies not only enhance decision-making processes but also enable real-time risk assessment and personalized investment strategies, ultimately driving superior returns and client satisfaction.

13. Do you see growing interest amongst Indian investors to invest in overseas market, whether directly or through the GIFT city?

Shiv Sehgal

Absolutely, there's a noticeable uptick in interest among Indian investors to tap into overseas markets, both directly and through platforms like the Gujarat International Finance Tec (GIFT) City. Recent data indicates a substantial increase in outward remittances from India, with the Reserve Bank of India (RBI) reporting a notable increase in individuals' overseas investments, reflecting a growing appetite for international exposure. Factors, such as portfolio diversification, access to global opportunities, and risk mitigation strategies drive this trend. Additionally, initiatives like GIFT City offer streamlined avenues for international investing, further catalyzing investor interest in exploring offshore markets.

Ankit Jain

We see a good interest from Indian investors to invest in overseas market both directly and via through the Gift City. They would like to diversify their investments across asset classes, and many global markets, especially US Tech, provide good return potential. Additionally, there are many themes and sectors present in global markets, such as AI, EV, Genomics, Semi-Conductors, Block Chain, ED Tech, Cloud Computing, that are not present in India, and the investors can gain exposure to those themes. The dampeners to global investing are taxation, investment limits (especially in Mutual Funds wherein further exposure is not possible for overseas securities), and LRS limits (for the Gift product).

Conclusion
 

India’s exponential growth in GDP, bolstered by low inflation, government reforms and macroeconomic stability, is attracting a significant influx of foreign investment that is set to continue.

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