The best investments often reveal themselves during downturns, and India has shown strength in adversity. India’s economy continued to thrive even as rising interest rates in the United States put pressure on emerging markets. World Bank statistics show that Indian GDP increased an impressive 7% in 2018. India has now grown faster than China, America, and every other large economy for five consecutive years. The S&P BSE Sensex stock index for India repeatedly powered through to new highs over the last decade.
While the bull market continues, India has also been affected by higher global interest rates. A credit crunch reduced India’s GDP growth to 5.8% in Q1 of 2019, which may present opportunities for investors. An easing global monetary policy environment should be more than enough to sustain this young and growing market.
A Young and Growing Market
There are numerous indications that India can sustain high levels of growth during the next several decades. Nominal GDP per capita is still under $2,200 per person compared to almost $65,000 in the United States. The landslide reelection of Prime Minister Narendra Modi in 2019 demonstrates continued public support for pro-market economic reforms.
Nearly ideal demographics are also fueling India’s rise. The fertility rate fell from 5.9 in 1960 to 2.3 in 2017. As a result, India’s productive working-age adults account for an unusually high share of the population.
Continued healthy population growth also helps India’s economy avoid the deflationary issues affecting Japan, China, and Europe. According to the World Bank, India’s stock market capitalization was 76% of GDP in 2018. That is somewhat high for a developing country, but still far below the 126% level reached by China in 2007.
The Strengths of Private Capital
The relatively high valuations in the stock market suggest that private equity may be more attractive. Bain found that the number of private equity funds active in India increased from 309 to 491 between 2012 and 2017. Funds also continue to produce high cash flows into India and strengthen the currency.
Private capital investment in India for 2018 was 26.3 billion US dollars, down just slightly from the record inflow of 26.8 billion in 2017. More than 80% of funds surveyed by Bain considered financial services attractive, higher than for any other sector.
“The continued development of financial services in India make it one of the best emerging markets for private lending.”
Kijana Mack, Senior Managing Director
Developing Credit Markets
The laws governing India’s financial sector have become dramatically more sophisticated, opening up opportunities for lending. India’s 2016 Insolvency and Bankruptcy Code gives creditors clear rights and guarantees faster resolution of proceedings. Furthermore, credit bureaus now have about ten years of records on Indian companies and individuals to assist in making credit decisions.
The market is ready, and the demand for loans is high. According to Omidyar and BCG, about 40% of Indian micro, small, and medium-sized enterprises rely on non-bank lending. These loans often charge more than twice the official interest rate.
Private lenders in India can profit and gain market share by providing entrepreneurs with more affordable credit. Non-bank financial companies are also facing new problems with bad debts, which increases the potential for higher returns.
The current turmoil in Indian credit markets will eventually be resolved, and much of today’s distressed debt will become profitable. Appropriate measures are being taken to increase liquidity. The Reserve Bank of India already reduced interest rates to 5.75% in June. The Indian government also recently put approximately 10 billion US dollars into supporting lenders.
Finally, the Federal Reserve is widely expected to cut US interest rates later this year. The Ashton Global Emerging Markets Direct Lending Fund searches for these special situations in developing credit markets. With proper selection, temporary illiquidity creates possibilities for higher returns.
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