Indian gurudwara

India: Accessing the one of the world’s most powerful growth engines

India has long been one of the world’s fastest-growing economies, and is expected to remain so in the coming years. The latest OECD interim forecast has revised real GDP growth upwards from 6.1% to 6.2%, with 6.5% forecast for 2025¹ – levels beyond the wildest dreams of most developed economies.

So it’s perhaps no surprise that Amit Mehta, portfolio manager of the JPMorgan Indian Investment Trust (JII) since the trust’s change of management in September 2022, is feeling pretty upbeat about the prospects for his trust. 

Key growth drivers

The Indian investment story is certainly a powerful and enduring one. For Mehta and his team, it’s driven by the long-term trend of increasing consumer penetration.

There are several aspects to this trend.  Lifestyle upgrades play an important part, underpinned by India’s youthful demographic profile, widespread urbanisation and growing demand for more expensive and luxury products.

At the same time, consumer demand for financial products and services – from banking to insurance, broking and pensions – is becoming increasingly complex and broad-based. Most obviously, says Mehta, “there’s rising stock market activity with much more retail participation”. More than 20 million new broking accounts a year are being opened across the country, he reports.

A third strand to India’s economic success is the rise in offshoring, as companies such as Apple and Tesla look to invest in manufacturing facilities there. In part, this development reflects the ‘China plus 1 strategy’ being adopted by businesses in order to diversify their supply chains and become less reliant on China. 

Why is India seemingly expensive?

While the long-term prognosis for India is very attractive, the JII team are up against the fact that the Indian market remains expensive relative to other countries. How can they justify this valuation premium?

The data speaks for itself, argues Mehta. Comparing annualised total returns for the MSCI India index with a broad range of key global markets, India, alongside the US, achieves the highest levels of corporate profitability for the lowest levels of volatility2.

“It’s therefore no surprise that two of the best-performing markets in terms of annualised total returns over the past five, 10, 20 and 30 years have been these two,” he adds. Indeed, MSCI India index’s annualised returns have been notably consistent, over all time periods, at around 12-13%3.

For Mehta, therefore, “a significant proportion of the Indian market’s valuation premium is absolutely justified, though there are some areas where we think valuations do look a bit more stretched”.

JII: Maintaining its quality focus over the long term

Despite this positive backdrop, Mehta acknowledges that it has not all been plain sailing for JII, with its emphasis very much on “high-quality businesses with the ability to compound earnings for the long run, overseen by reliable management teams and trading at a discount to market value”.

The trust returned just over 12% in 2023, slightly below the benchmark – a reflection primarily of strong outperformance in the wider market by value-focused sectors including property, utilities, steel and energy during the second half of the year. With its quality growth orientation, JII’s portfolio remains very underweight in these deeply cyclical parts of the market, which continue to do pretty well in 2024.

However, Mehta is not unduly concerned. “The underlying return on capital is very low throughout cycles for these sectors, so we won’t be increasing exposure,” he comments.

Instead, the team continues to concentrate on building the best long-term ideas to capitalise on the Indian growth story. It’s reflected in the portfolio’s top 10 holdings, which include consumer companies such as Hindustan Unilever, banks such as ICICI and HDFC, and IT services such as Infosys Technologies.

While Mehta is quite happy with this core of reliable domestic giants, the team’s considerable research and analysis resources are directed primarily elsewhere.

“The most exciting stuff is happening further down the list with the smaller and mid-cap businesses, though at present some of the opportunities are masked by high valuations,” he explains. “We’d love to have a bit more in that space, but we’re not going to push it until valuations look more attractive.”

Mehta highlights a number of interesting but less well-known additions to the portfolio over the past year, including manufacturers Tube Investments and Triveni Turbine, IT services provider Coforge, and Cholamandalam, which provides non-bank credit for areas of the rural market where banks will not lend.

“Businesses like these won’t appear in the top 10 holdings, but they make up much of the portfolio and we think they offer the most interesting opportunities,” he says.

Last year’s style rotation may have caused some short-term headwinds for JII, but it’s clear that India’s dynamic economy still provides rich pickings for experienced quality growth-focused investors with a long-term view. 

1 OECD Economic Outlook, Interim Report February 2024: Strengthening the Foundations for Growth
2 J.P. Morgan Asset Management, as of April 2023
3 Source: Factset, JPMAM and MorningStar. All figures are on a total return basis. 

The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell