December 2016

INDIA: India’s star shines bright

India has relaxed rules on foreign investment, promising to boost its economy. Fiona Rintoul reports. New research from UBS highlights a global power shift. Among top-earning 18 to 34-year-olds, those in China, India and Mexico are more confident about achieving their wealth aspirations than those in the UK, Germany
and Singapore. Where once, young people in emerging markets were hindered by political instability, now it is their developed-market cousins who face these problems. The rise of populism in Western democracies adds a new dimension to the economic power shift from developed to emerging markets that has been talked about for years. No country is better placed to benefit from this shift than India, a vast democracy whose economic star has never shone brighter. Central to India’s current economic dynamism is prime minister Narendra Modi’s ‘Make in India’ reform agenda, which aims to facilitate investment. As part of this, India’s government has liberalised foreign direct investment (FDI) rules in sectors including insurance, pensions, railways, defence, e-commerce and civil aviation. WELCOME MEASURE
“The key idea is first, to boost the manufacturing sector and thereby create jobs, and second, to increase infrastructure development and improve quality of life for citizens,” says Karine Hirn, partner at East Capital, a specialist emerging markets asset manager. “The impact is already being felt.”  In 2015, India was the tenth-largest FDI recipient with $44 billion of inflows, up from $35 billion the previous year, according to figures supplied by East Capital. “The FDI rule changes are a welcome measure,” says Aashish Mishra, head of securities services for Citi India. “A lot of sectors that were difficult for overseas investors to access have been made available.” Emerging market investors also believe the new rules will create a virtuous circle that encourages further foreign investment. Relaxation of FDI rules might bring in international players and improve corporate governance levels, for example. However, Mishra emphasises that relaxation of the FDI rules is just one part of a wider reform agenda that “makes the investment climate very positive”. Other key planks are the goods and services tax, a value-added tax due to be implemented in April 2017, and infrastructure spending. SO DYNAMIC
“Under Modi, a lot of public spending has been targeted specifically towards infrastructure,” says Sanjay Sachdev, chairman of ZyFin, a specialist emerging markets asset manager based in India that runs a range of exchange-traded funds (ETFs). For example, the government has taken what Sachdev describes as “a very pragmatic approach” towards crucially important power distribution, which can be a powerful brake on economic development if handled badly. In India, the cost of power is coming down, and solar and wind energy are being widely used. It’s all part of a coming age in what is a massive market with very positive demographics. Under prime minister Modi, the pace of change has accelerated, and you can almost feel the positivity oozing out of Indians involved in the local investment market. It’s in stark contrast to the anger and pessimism often on display in the developed world, as sections of the population kick back against globalisation and all it has brought. “Globalisation is inevitable in India,” says Sachdev. “It’s so dynamic. It’s almost difficult for me to accept how change is happening so rapidly.” All of this – combined with high levels of education and a robust democratic base – has made India stand out among emerging markets. BLACK MONEY
The sky is not cloudless, however. In the short term, investors’ enthusiasm for India has waned somewhat in the face of the Indian government’s demonetisation drive, described by Mark Tinker, head of Framlington Equities Asia for Axa Investment Managers, as one of the few genuine ‘black swan’ events in a year of global shocks and surprises. “The decision by India to address its black economy may yet run into the law of unintended consequences,” says Tinker. “While the idea of withdrawing the larger-denomination notes may work in the medium term, it is causing some problems in the short term.” One of these is a fall-off in investment from foreign institutional investors, who had provided strong inflows over the past three years. “They have turned net sellers recently due to the double impact of strengthening yields in developed markets and the demonetisation shock to the domestic economy,” says Hirn. “However, in the medium term, we think India will continue to see good inflows from foreign institutional investors.” GO MAKE MONEY
A deepening domestic investor base is a feature of maturing emerging markets, and this dynamic is now fully at play in India. The pensions and asset management industries are expanding rapidly, and the market is being supported by both institutions and households. “If you look at local Indian asset management and pensions, it’s small by developed market standards but we do see a high rate of growth of assets, with overall assets managed by this industry likely to become quite significant over the next few years,” says Mishra. Ironically perhaps, given the short-term turmoil it has created, demonetisation is predicted to boost this growth. “Go make money!” urged The Economic Times of India at the end of November 2016, predicting that household savings placed in the equity markets could rise from $25 billion to $100 billion, as banks slash deposit rates in the wake of demonetisation. “We believe calendar year 2017 will be the year of the biggest domestic liquidity-driven rally in the history of Indian capital markets,” Jimeet Modi, chief executive of SAMCO Securities, told the newspaper. “Demonestisation is a blessing in disguise for capital markets, wherein a large amount of domestic savings will get channelled to financial markets by providing risk capital to companies coming out with IPOs and FPOs.” If this wave of investment happens, Sachdev believes there will be plenty of asset management companies there to mop up the money. “There’s a lot more interest,” he says. “A lot of people are doing due diligence and looking for opportunities to set up shop.” Already Indian asset managers – many of which are joint ventures with UK, US or French companies – offer a range of global products as well as Indian products. Companies such as ZyFin and the well-known Kotak are also selling Indian products overseas. As more money flows into the asset management industry, this bilateral diversifying trend will intensify. “As Indians create more wealth, they’ll want to look at global assets and diversification,” says Sachdev, while Mishra predicts more overseas activity by Indian asset managers, much of it through offshore centres. This desire for diversification will be facilitated by new initiatives to open up the mutual fund market in India. The Securities and Exchange Board of India (Sebi) is working with the International Organisation of Securities Commissions (IOSCO) and regulators in other Asian countries to introduce new regulations whereby Indian mutual schemes could be sold elsewhere without the fund house having to register separately with the regulator of that country or setting up a subsidiary in the jurisdiction. Schemes from these countries would then also be allowed to be sold in India. HOME-GROWN
It’s the latest liberalising salvo in a market that is changing fast – and where, as Mishra emphasises, ongoing growth is supported by digitalisation. Perhaps it will be the beginning of the end of the country’s joint-venture arrangements, which have given foreign asset managers access to local knowledge, brand and bank distribution, but which do tend to be a staging post in the development of any emerging market’s finance sector. “The mix has not worked too well as many international partners have sold their mutual fund businesses in the country over the past three years,” says Hirn. Foreign companies such as Standard Life, the largest asset manager, have contributed a lot. “They understand how to enter and how to establish businesses,” says Sachdev. “They’ve been very successful here. It’s no coincidence that the two largest asset managers in the country are joint ventures with UK companies.” But you sense that the future may belong to home-grown enterprises. Certainly, Mishra’s primary focus for the next couple of years is the local institutional investment business. “I’m very excited about that,” he says. In a shifting world, those years could be crucial for India, where, according to UBS’s new research, 99% of top-earning 18 to 34-year-olds anticipate starting their own business, compared with 59% in Germany and 63% in the UK. A few years from now, India may no longer be a star emerging market, but simply a star market. “Today we are part of the emerging markets, but that might change in the next few years,” says Mishra. ©2016 funds global asia

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