India: a commitment, not just an asset allocation
New York and London are justly proud of their stock markets, which grew out of street corner trading in stocks and shares. Share-trading in Bombay is nearly as old and has a tale which is remarkably similar. At first, in the 1850s, traders operated under the shade of banyan trees in front of the town hall. As their number and rowdiness grew, they regularly overflowed their spot and had to move on, until they eventually found a home in Dalal Street in 1874. The Native Share and Stock Brokers Association, founded in 1875, was the first stock exchange to be recognised in the 1950s under the first form of regulation after independence.
Thus, the oldest stock exchange in Asia became the Bombay Stock Exchange. Its main index,
the Sensex, is followed worldwide and was a formative influence on the development of capital markets in India. The National Stock Exchange was formed in 1994 at the instigation of the government, as an automated paperless exchange, following an earlier stock scandal. The NSE has grown in parallel and in competition with the BSE and now trades the majority of the major listed stocks in India.
The Nifty Index is the basis for the first traded index derivatives, and a liquid futures and options market thrives on an electronic exchange. India's stock exchanges between them list the shares of more than 7,000 public companies.
India is a constitutional democracy with separation of powers between the executive, legislative and judicial branches of government. The federal parliament and 26 state assemblies are elected every five years. Democracy is robust and, especially at the state level, turnover in government can be high. It is often argued that this has caused a "democracy discount" in the rate of economic growth India has enjoyed, relative to totalitarian China, by contrast.
Government has two key responsibilities in developing countries: the first is to reduce interference in everyday life and the second is to develop infrastructure and basic social services. In the second of these, Indian government is hobbled by politics at the national and state levels, but it excels at the first: taking a laissez-faire approach to private enterprise.
The response of the corporate sector to an uninspiring budget this year was to cheer at being left alone. Business is prepared to hoe its own row and drive development independently, and this serves its own essential interests. When the times are good and earnings growth is strong, as is the case in 2006, capital expenditure expands and government revenue receipts grow well ahead of expectations. Business thrives with the support of common law. The judiciary may move slowly through a huge backlog of cases, but contract is sacrosanct and the path to remedy is clear.
India's working population is close to 20% of the world's total but its nominal GDP at just $800bn (€626bn), is less than 2% of the global total. This gives a graphic picture of the potential if India eventually does punch its economic weight. Since the early nineties when Manmohan Singh, as finance minister, launched India's economic reform programme, the economy has gathered growth momentum to the point where it now seems capable of sustaining 9% GDP growth year on year.
The participation of private enterprise in globalisation has been unrestrained, though the commitment of the government to economic and social reform and infrastructure development has been less than consistent.
The success of private enterprise has been underlined by the performance of the stock markets, which have achieved historic highs, corrected and recovered again. The earnings reports of the major companies have exceeded expectations by a wide margin. Average earnings growth in fiscal 2005 was comfortably over 20% and in the first quarter of 2006 was almost 50%.
In spite of the export successes of the technology sector in business process outsourcing, company results have been due in large part to a distinctive characteristic of the Indian economy among developing markets: it is substantially domestic demand-driven.
India depends less on demand for its exports from overseas markets. Favourable demographics, accommodating government policies and a common law legal system with stable institutions provide a hospitable framework for investment by foreign institutions. A long history of capitalism and stock markets which underwent dramatic modernisation in the nineties inspire confidence in the markets. More than 7,000 listed companies in a full range of business segments offer depth and breadth of investment opportunities.
India will pull its weight in economic terms; in the meantime global investors have many means of accessing its markets. The dominant route is through its equity markets, which have drawn many long-only funds as well as a variety of hedge funds.
Increasingly major private equity houses are raising pools of investment, aimed mostly at the massive infrastructure development plans being promoted by the government. There are also lively markets in private placement activity as well as derivatives.
India has substance which is far greater than is offered by most developing markets. Combined with the scale of opportunity represented by its development potential, it makes a compelling case for long-term commitment by investors. We are convinced that this makes it more than just a target for a global asset allocation programme.
Ian McEvatt is a former director of Credit Agricole Indosuez in the Asian region. Iceman Capital Advisors. is the investment adviser to Himalayan Fund, one of the oldest listed funds investing in India, previously managed under the Credit Agricole umbrella.