When night fell on 2016, Indians suddenly found their 500 and 1000 rupee notes worthless. Amidst this fiscal turbulence, a mobile payment service, Paytm, solidified its position as a financial powerhouse. Prior to the currency reconfiguration, Paytm's user base hovered around 120 million. Yet, within a mere quarter, it accrued over 50 million new users, marking an astounding growth of nearly 40%.

Two hundred years ago, Napoleon remarked on China under the Qing dynasty as a dormant lion, poised to shake the world upon awakening. Today, with its sprawling demographics, expansive territory, and rich history, one can't help but wonder: Will India become the sleeping tiger of the modern era?

Summary

• Surpassing China, India now holds the mantle of the world's most populous nation. Yet, its average age of 28 positions it distinctively among the top ten economies. This youthful demographic is perceived as a potential driver for sustained economic momentum in the long run.
• Since ascending to India's helm in 2014, Prime Minister Modi has championed a series of economic reforms, notably the "Made in India" initiative, which prioritizes industrialization. While leaning into protectionist policies on the foreign front, domestically, the administration's tilt towards big business has paved the way for conglomerates such as Adani and Ambani.
• Investor sentiment towards India remains bullish, buoyed by factors such as consistent economic growth, the onset of a capital expansion cycle, expectations of central bank interest rate cuts, and a sustained influx of both domestic and foreign capital into the equity market. Coupled with its low geopolitical risk, India's financial market presents a compelling proposition for global investors.

Demographic Advantage

This April, India clinched the title of the world's most populous nation, eclipsing China. Data from the World Bank shows that India's population is approximately 1.425 billion at present. But it's not just the sheer numbers that intrigue economists: it's the youthfulness. Boasting an average age of 28.4 years, India’s demographic profile is the youngest among the major global economies.

A pivotal metric for economists, the proportion of the population aged between 15 and 64, epitomizes the working-age populace. This cohort is a barometer of a nation's labor force potency. As per trends depicted in Bloomberg's chart below, India's working-age ratio has been on an uptrend since 1992, registering a steady 0.3% annual growth. Analysts project this demographic tailwind to bolster India's labor market until at least 2030. China, in contrast, peaked in 2011 with a 73% working-age ratio, and has since been grappling with the socioeconomic challenges of an aging population.

In general, India’s huge and relatively cost-effective young labor force can drive the country’s economic strength and capital market development in the long term.

• Human Capital Reservoir: India's youth represents a reservoir of potential. With targeted training and education initiatives, this demographic could evolve into a highly efficient workforce, propelling productivity and bolstering industrial competitiveness.
• Consumer Dynamo: The burgeoning young populace foreshadows robust domestic consumption. Beyond sheer volume, this demographic is poised to drive demand for intricate and diversified financial products and services.
• Investment Magnet: India's youthful demographic, coupled with its relatively benign geopolitical landscape, is increasingly resonating with foreign investors. As East Asia's industrial supply chains evolve and Sino-US tensions intensify, global investors are eyeing India as the next factory hub. Apple's recent announcement to shift a quarter of its iPhone production to India in the future is a testament to this trend. Notably, Elon Musk's dialogues with Prime Minister Modi about Tesla's Indian ventures further underscore India's rising industrial allure.

Economic Reforms

In 1991, as the Soviet Union – India's primary trading ally – collapsed and the Gulf War sent oil prices skyrocketing, India teetered on the brink of a massive economic crisis, nearly defaulting on its sovereign debts. In response, the International Monetary Fund and the World Bank stepped in, offering aid but demanding sweeping economic reforms in return. These reforms, which included slashing import tariffs, easing market restrictions like the licensing system, and implementing tax cuts, opened India's doors to substantial foreign investment. Consequently, between 1995 and 2018, India's exports surged, growing at an impressive average annual rate of over 13%, second only to China and Vietnam. During this period, India's GDP also soared, registering an average annual growth rate of 5.5% and surpassing both the UK and France in terms of total output.

In stark contrast to many East Asian economies, which traditionally leaned on labor-intensive sectors to incrementally elevate their industrial landscapes, India opted for a more ambitious route. The nation set its sights squarely on globally advanced sectors, especially emphasizing the computer software industry, aiming to leapfrog stages of development through technological assimilation. The result? A burgeoning service sector, dominated by outsourcing, that steadily grew its share of India's GDP.

Yet, by the time Prime Minister Modi assumed office in 2014, the initial momentum from these reforms had begun to wane. A resurgent wave of anti-globalization and protectionist sentiments posed challenges, particularly as key sectors like IT and finance struggled to integrate fully with the broader domestic economy. Moreover, these lucrative industries, despite their high value-add, offered limited employment avenues, exacerbating the nation's job scarcity.

In tackling these challenges, Modi unveiled the second wave of economic reforms, championing the "Made in India" initiative. The agenda realigned the nation's focus back to industrialization, while the external economic stance pivoted towards protectionism. Domestically, policies increasingly favored businesses and major capital entities, even as subsidies for common consumers were curtailed, unfortunately deepening the wealth divide.

As we approach the decennial of the "Made in India" initiative, there are promising signs. The Indian economy is poised on the cusp of a fresh investment cycle, with sectors like infrastructure and construction showing robust growth. Complementing this is the historically low leverage amongst Indian corporates, suggesting a healthier balance sheet and room for further capital deployments. After a phase of deleveraging post the prior capital expenditure boom, these firms have amassed a war chest of savings, setting the stage for sustained economic dynamism in the years ahead.

Adani and Ambani

In India, the names Ambani and Adani are as ubiquitous as Samsung is in Korea. Picture this: Living in India, you might surf the web using Ambani's Reliance network, while your lights are powered by Adani electricity. You could shop on Ambani's e-commerce platform, picking out products imported by Adani. The gasoline fueling your car? Refined by Ambani's conglomerate. And the roads you drive on? Constructed by Adani enterprises. Even your entertainment choices might be courtesy of Ambani-produced content. Planning a trip? You're likely landing at an Adani-operated airport.

Often referred to as India's Rockefeller, Ambani's Reliance Industries stands as the nation's largest company. In a meteoric rise, Adani, seemingly coming out of the blue in 2020, clinched the title of Asia's wealthiest individual and secured the second spot on the global rich list.

In 1962, in the heart of a middle-class neighborhood, Adani was born. At just 26, he showcased his entrepreneurial spirit by founding a trading company. Fast forward to 1995, he strategically secured the port in his home state of Gujarat. This move was further amplified in 2001 when Narendra Modi assumed the role of Gujarat's Chief Minister, forging a potent nexus between the two powerhouses. This alliance was evident when Adani acquired land at the astonishingly low price of 32 rupees per square meter, a sharp contrast to the prevailing 470 rupees rate for other private entities.

By 2014, as Modi clinched India's Prime Ministership, Adani's fortunes soared, with his company's stock value tripling. Cementing his empire's expansion, in 2018, the Adani Group made a bold move: without prior experience in aviation, they successfully bid for and won all six of India's airport auctions, emerging as the nation's premier private aviation magnate.

Today, the Adani conglomerate boasts of seven publicly traded entities, covering power generation, mining, power grid, airport, natural gas, renewable energy, food processing and public construction.

Born in 1957, Ambani hails from a lineage of visionaries. His father, a pioneer in his own right, laid the foundation for Reliance Commercial Corporation in 1958, with a core focus on the polyester fiber sector. Over the years, this seed grew, branching out into realms like oil and telecommunications. By 1977, Reliance Industries marked its footprint on the stock market and, by 2000, it towered as India's paramount corporation. Following his father's demise, Ambani inherited this behemoth, further diversifying its reach into retail by 2006 and telecommunications by 2016, crowning both sectors with leadership positions.

At the end of 2022, Ambani had a personal wealth of $94.8 billion, ranking eighth in the world, while Adani had a personal wealth of $150.8 billion, ranking third in the world. Both titans, Adani Group and Reliance Industries, command a market valuation hovering around the $200 billion mark. However, a stark contrast emerges in their revenue streams: Adani Group's stands at $22.7 billion, dwarfed by Reliance Industries' colossal $109.6 billion.

Earlier this year, ripples were sent across the financial world when Hindenburg Research, a notable Wall Street short-seller, leveled charges against Adani for alleged stock manipulation and financial discrepancies. This accusation slashed Adani's fortune by half, but he still clinches a respectable 22nd rank globally.

Opportunities in the Indian Market

Riding the wave of persistent foreign capital inflows and the subsequent rally post the Adani Group's short-selling episode, India's equity market capitalization reclaimed its position as the fourth-largest globally this year, trailing only the U.S., China, and Japan. A substantial chunk of this valuation, along with the associated earnings, is anchored in the financial sector. Blue-chip banking entities such as HDFC, ICICI, Axis, and Kotak Mahindra underscore the robustness of India's banking landscape.

Given the scale of India's publicly-traded firms, with several wielding industry monopolies, they've been able to capitalize on Prime Minister Modi's pro-corporate stance. Consequently, a slew of India-centric ETFs have consistently reaped the rewards of these conglomerates' robust earnings, showcasing resilient performance trajectories over recent years.

The structural reforms spearheaded by Prime Minister Modi over recent years are starting to manifest tangible results. Amid the pandemic, domestic savings in India surged, bolstering the nation's stock market. Presently, the savings rate hovers around 30% of the GDP. Data as of August 9th indicates that Indian equity funds have sustained net inflows for an impressive 29 straight months through July.

Moreover, with the Federal Reserve nearing the culmination of its rate-hike cycle, India's Consumer Price Index (CPI) is on a deceleration trajectory, remaining below the Reserve Bank of India's (RBI) threshold. Current market sentiment anticipates an initiation of rate cuts by the RBI towards the end of 2023, a move poised to further buoy stock market performance.

Amidst global economic headwinds, India stands resilient with its robust and accelerating economic trajectory. As China grapples with macroeconomic uncertainties and the U.S. treads cautiously with elevated interest rates – threatening the stability of risk-laden assets – global investors are diverting their gaze towards India. The steady influx of foreign capital into the nation is a testament to its economic allure. In this turbulent global financial landscape, where economic slowdown fears loom large, India is increasingly emerging as the investment world's sanctuary, and has been seen as a new safe haven.

Investment ideas

India's market allure is anchored in its vast, yet cost-effective, reservoir of human capital, notably its science, engineering, and English-proficient populace. Coupled with a burgeoning young workforce and an expanding consumer base, the country presents a compelling case for sustained economic and capital market expansion. From a foundational perspective, these elements are set to fuel India's economic propulsion.

Due to the low liquidity of overseas listed Indian depositary receipts, we advocate for an ETF-centric approach to tap into India's growth trajectory. These ETFs encapsulate a curation of premier Indian enterprises, with some even commanding industry monopolies, ensuring robust profitability prospects. Below, we provide a curated list of Indian ETFs, accompanied by their historical performance metrics: