A new India is emerging and investors would be wise to overweight the country by investing above its ‘modest’ 8.5% allocation on the MSCI emerging market index, according to Hermes’ head of emerging markets Gary Greenberg.
In a note following a recent trip to India, Greenberg said India’s making its presence felt in Asia as a ‘strategic counterweight’ to China as its reforms seem much more long-term in contrast to its superpower neighbor.
Indian prime minister Narendra Modi has initiated significant reforms to fix structural programs in its economy with moves to demonetize the nation in November 2016. Greenberg said his trip confirmed his conviction that ‘profound long-term’ change in the region is underway.
‘The world is now seeing a new India emerging, and the space once held by outdated conglomerates from the time of the red-tape ridden ‘license raj’ and the informal economy is being claimed by businesses willing to compete through innovation and efficiency,’ said Greenberg.
While investing in India during a transitionary phase is challenging, he has highlighted four companies he believes will be able to endure short-term cycles and succeed in the medium to long term and ‘reward patient investors as India’s true emergence takes shape’.
Top stock picks
1. Motherson Sumi Systems
Motherson Sumi Systems, a holding in Greenberg’s Hermes Global Emerging Markets fund, focuses on automobile wiring, which he believes is well placed to benefit from the ongoing electrification of cars in the region.
He said: ‘Since 2008, the company has grown its European business by acquiring distressed but strategic tier-one vendors to original equipment manufacturers like Volkswagen, Audi and Daimler, usually at their behest in return for attractive long-term contracts.
‘With the turnaround of acquired companies largely complete, Motherson Sumi has expanded its global footprint by adding 17 factories recently, and it is prepared to address its $12.4 billion order book. Since the company earns 50% of its profits from its Indian operations, road-building and a more comprehensive national 4G mobile network (and, in time, 5G) will steadily improve traffic flow, allowing more cars on the road.’
2. Tech Mahindra
IT services company, Tech Mahindra, makes Greenberg’s picks as it offers technology solutions for healthcare, police, cyber-security and emergency response systems to governments at the state and central level.
‘The company, a holding in our portfolio, is well-positioned to benefit from the expansion and increased sophistication of digital enterprise and services in India,’ said Greenberg.
‘It helped the nation’s financial-market regulator to digitally transform its processes and end-user experience, and was recently selected by the state government of Jharkhand as a strategic partner to facilitate its digital journey and generate employment through skills development.’
3. Power Grid Corporation of India
Another holding of Greenberg’s is the Power Grid Corporation of India, a company tasked with the expansion and strengthening of India’s inter-state transmission networks.
‘Its work is essential in connecting states with power surpluses or deficits. The company has an order backlog of $20 billion, which it will act on over the next four-to-five years,’ he adds.
4. Container Corporation
Another infrastructure bet, Container Corporation (Concor) will be a prime beneficiary of the Western Dedicated Freight Corridor, a freight route to connect Delhi and Mumbai which is currently under construction.
Concor is also likely to benefit from India’s upcoming goods and services tax, which is due to be implemented in 2017.
‘This will eliminate the cascading duty payments of the current indirect tax regime and thereby increase the attractiveness of a third-party logistics business model. Concor customers have shown interest in scalable logistic facilities and are considering outsourcing some of their supply chain functions to the business.’