Large scale infrastructure projects at the heart of Narendra Modi's reforms will be one of the main drivers of strong multi-year growth for India.
That is according to Barings’ head of Indian equities, Ajay Argal, who also pinpointed banks and the generic drugs sectors as potential big winners.
Argal, who runs the Barings India fund, said he has increased cyclical exposure since Modi's election victory, adding to consumer discretionary stocks, banks and industrials, with the latter focused mainly on India's infrastructure sector.
He said around $100 billion dollars has already been committed to much-needed road and power projects but that Modi's government is looking to commit much more capital to the area as India continues its rapid pace of urbanisation.
Reform of the labour market is also a key part of the jigsaw. However, despite reforms already being implemented in Madhya Pradesh and two other Indian states, Argal said the federal nature of India's political system means labour reform could take up to a decade to come to fruition.
Argal told Citywire Global: 'The job gap and labour reform is a long term project but in the short term, the most important development is to start running large infrastructure projects.’
‘This is the key priority with around $500 billion pledged and $100 being committed right now. Before Modi came to power many of these projects were not moving at all, and others were only partially implemented.’
'But Modi has set up monitoring groups to make sure infrastructure projects are being carried out correctly. If they see further bottlenecks they are going to get their hands dirty.'
Healthier banking system
With India's banks split roughly 50/50 between the wholesale and retail sectors, banks are now making up a significant part of the lending to infrastructure, with around 30% of their corporate loan books now allocated to projects in the sector, Argal said.
The country specialist said he is also encouraged by the fact significantly more money has started to flow into fixed bank deposits as inflation has come down sharply in recent months.
He said the country has a large number of well-run private banks that have been able to benefit from stronger recent fundamentals, with demand for mortgages and cars sharply increasing.
'India still has one of the lowest penetration rates of car owners in the world, but loans to buy cars are growing at around 4.5%-a-year,’ Argal added.
'Even in the loan books, lending has grown quite slowly and mortgages make up less than 10% of GDP so there are big opportunities in deposits for the banks. Over the last one-and-a-half years a lot more money has gone into fixed deposits and less has gone into gold.’
'In 2013, $50 billion of gold was imported but that is now down to $20 billion. With inflation down at 5% now and 8 to 9% yields available on one-year deposits, it has become much more profitable for Indians to put more money into fixed deposits.'
Argal said, with the real estate sector also subdued due to slowing GDP, some of this money was also now finding its way into fixed bank deposits.
The Baring India fund returned 49.65% over the 12 months to the end of November 2014 in US dollar terms. This compares to a rise of 36.69% by its Citywire benchmark, the MSCI India 10-40 TR, over the same period.