India Poised to Dominate Emerging Markets as the Breakout Star of the Decade, says one of India’s largest FPIs

Opportunities for investment in real estate, financials, and industrials are identified as potential areas for growth.

India's robust economic growth, political stability, and transformative reforms have put the country on track to become the breakout emerging market of the decade, said Capital group, one of the world’s largest institutional investors and India’s largest foreign portfolio investors in a recent report. The Capital Group manages assets worth $2.2 trillion across the world. “India is known as the market that has confounded optimists and pessimists alike. Could this be its decade to shine? From our recent travels around the country, we believe indications are pointing in the right direction: Corporate confidence is high, the economy is expanding at a decent clip and technological innovation is leading to new areas of growth,” noted Brad Feer, Shlok Melwani and  Rahul Sadiwala in a recent report.

The report sheds light on the factors that set India apart as an attractive investment destination when compared to other emerging markets. These include India's recent political stability, pro-business reforms, infrastructure development, manufacturing potential, growing equity market, investment opportunities, and demographic advantage.

Under the leadership of Prime Minister Narendra Modi, India has witnessed a series of pro-business reforms that have propelled growth and brought sweeping changes to the economy. Innovations such as Aadhaar, a biometric identification system, and the implementation of a national goods and services tax (GST) have streamlined processes, expanded credit availability, and formalised previously unregulated sectors. Moreover, the introduction of the Unified Payments Interface (UPI) has revolutionised the payment system, benefiting both traditional banks and non-bank financial companies.

Further solidifying India's rise as a global power, PM Modi's recent visit to the United States garnered significant attention. Addressing Congress, meeting influential business leaders, and dining at the White House, Modi's engagements provided positive indications of high corporate confidence in India's burgeoning economy.

One of the standout aspects highlighted in the report is India's infrastructure boom, which has overcome major obstacles and is now propelling the country's growth potential. With massive investments in roads, railroads, airports, and seaports, connectivity has significantly improved, reducing travel time and transforming the skylines of cities like Mumbai with the construction of towering buildings and the expansion of residential housing.

Another focal point in the report is India's concerted effort to become a major player in manufacturing and expand its presence in global export markets. By actively attracting foreign investments and cultivating a robust supply chain ecosystem, India has seen a notable expansion in manufacturing capacity, particularly in sectors such as mobile phones, home appliances, and electronics. As companies seek to diversify their supply chains away from China, India aims to position itself as an appealing destination.

The report also highlights the growth potential in India's equity market, particularly in the small-cap space. With India representing a significant portion of the MSCI Emerging Markets Index, there is ample room for expansion as the market remains relatively small compared to the country's economic size. The rise of initial public offerings (IPOs) and unicorns (startups valued at $1 billion or more) attests to India's ongoing transformation.

Opportunities for investment in real estate, financials, and industrials are identified as potential areas for growth. The underdeveloped real estate sector, projected to reach nearly 15 percent of India's GDP by 2031, is driving demand for building materials and related products. The banking sector also exhibits positive signs, with solid loan growth and a favourable credit environment. The report asserts that India's demographic advantage, characterised by a youthful population and increasing domestic consumption, will serve as a key driver of economic growth.

Notably, the energy transition holds immense transformative potential for India. Indian corporations are actively positioning themselves to compete with China throughout the value chain of clean energy, particularly in the realm of green hydrogen. Noteworthy players such as Reliance Industries, Larsen & Toubro, and Tata Power are capitalising on this opportunity, as indicated by Capital Group's discussions with government and industry sources. By reducing its reliance on imported oil and gas through renewable power sources, India would enhance its energy independence and significantly bolster its manufacturing sector.

India's expertise in specialty and commoditised chemicals also positions it as a key player in global supply chains, drawing companies seeking to diversify their manufacturing bases away from China.

In the telecommunications market, consolidation has left conglomerate Reliance Industries and Bharti Airtel as dominant players. Capital Group predicts that smartphone and data usage will continue to surge, especially with the rollout of 5G and fibre-to-the-home technologies in more cities.

While the upcoming general election in 2024 may introduce some political risk, the report emphasises that economic growth is a shared goal across political parties. Although valuations in the Indian market currently surpass historical averages, the report underscores that India's fundamental outlook remains robust. With stable economic growth, responsible fiscal policies, and reduced corruption, the market has the potential to grow into these valuations.

Despite experiencing fluctuations in the past, India's equity market has delivered some of the most impressive returns among emerging and developed markets over extended periods. As India forges ahead on its growth trajectory, the country emerges as a promising breakout emerging market of the decade.