Investment Strategies

Franklin Templeton Positive On India

Amanda Cheesley Deputy Editor 15 May 2024

Franklin Templeton Positive On India

Amidst the Indian elections, the lead portfolio manager of Templeton Emerging Markets Investment Trust and senior managing director at California-based investment manager Franklin Templeton, discusses trends shaping the Indian equities landscape.

Franklin Templeton manager is optimistic about India's macroeconomic outlook, reflecting how the country is growing in influence on the world stage.

Chetan Seghal (pictured) set out his views at a recent London media event on India – now one of the world’s largest and fastest-growing economies. According to the International Monetary Fund's recent World Economic Outlook, India surpassed the UK as the world’s fifth largest economy in 2022 and is expected to overtake Japan and Germany by 2027/2028. Incomes are also increasing in the country, with the rise of the middle class crossing a threshold for more discretionary spending.

The country's economic growth has been aided by structural reforms introduced by Narendra Modi’s ruling Hindu nationalist BJP government and infrastructure investment. Over the past decade, the government has enacted reforms, including rooting out excessive use of cash and digitalising the country, improving tax collection and investing in infrastructure. Incentives have been provided to attract electronics manufacturers to help India compete on the international market, for example.

The move comes in the midst of the country’s 2024 general election taking place from 19 April to 1 June, with Modi the clear frontrunner to win a third five-year term as prime minister. Sehgal thinks that a third term will be an opportunity for the Indian government to undertake policies which had been delayed. He thinks that Modi’s focus on conservative fiscal policies will persist. Additionally, there is potential for judicial and economic reforms that could enhance the government’s capacity to generate additional tax revenue. Investment in India’s workforce is another crucial area.

The rise of India as an economic and financial powerhouse has been chronicled for some time. Besides its home-grown reforms, the nation benefits from a shift in global supply chains, gaining manufacturing from China as Beijing locks trade horns with the US and Europe. As if to underscore that point, US President Joe Biden this week has imposed fresh tariffs on Chinese imports, for example on electric vehicles. A number of fund managers, such as Ocean Dial, have told this publication about what they see as India's opportunities – and risks. (See examples here and here.) The country is also trying to attract high net worth individuals of the kind attracted by hubs such as Dubai with the development of the Gujarat International Finance Tec-City – aka GIFT City.

Other wealth managers also favour Indian equities. Willem Sels, global chief investment officer at HSBC Global Private Banking and Wealth, has overweight positions in India, Indonesia, South Korea and now Japan. Shishir Baijal, chairman and managing director of Knight Frank India, also believes that India is increasingly recognised as an attractive investment destination for global and domestic investors, owing to its robust domestic consumption, long-term economic stability, and extensive infrastructural development. See more commentary here and here.

The tech decade
Modi has also dubbed the 2020s as India’s “Techade.” In the short term, the focus is to build capacity for domestic demand, while the medium-term focus lies in enhancing export capacity. Negotiations for free trade agreements are underway with the European Union and the United Kingdom. Recently, policymakers have concentrated investment in semiconductors to diversify the technology sector’s reliance beyond software services, he continued.

“One of the longer-term challenges for the country will be on the climate side. India is experiencing heatwaves ahead of the summer season and some regions are having water shortages,” Sehgal said. “Rising population and urbanisation have put further strain on the country's resources. Addressing these longer-term challenges should also be on Modi's agenda."

The manager thinks that India offers investors a significant growth opportunity given its structural tailwinds, which include attractive demographics, a market-oriented economy, and a rising middle class.

Sehgal recently bought into a few beaten down names in India which he said are doing well. These include PAYTM, an Indian multinational financial technology company that specialises in digital payments and financial services. They also include Policy Bazaar, an Indian insurance aggregator and financial tech firm and Zomato, an Indian food delivery company. “The country is also building up its renewables sector,” he added. Sehgal’s top 10 holdings also include Indian banks.

Sehgal is the lead portfolio manager of TEMIT, an investment company listed on the London Stock Exchange, which provides access to the growth potential of firms from fast growing economies such as China, Mexico, Taiwan, Korea and India, with £2.03 billion ($2.55 billion) in total assets. It also embeds ESG considerations, best practice, and analytics in its investment processes. Top 10 holdings include the Taiwan Semiconductor Manufacturing Company (TSMC), Chinese tech giants Alibaba, Tencent, as well as South Korean Samsung Electronics, Brazil’s Petroleo Brasileiro and India’s ICICI Bank and HDFC Bank.

The trust has strong exposure to Asia, although it is still underweight in India and overweight in Korea. It is also overweight in IT, and slightly overweight in healthcare. It has also shown positive performance over the last five-year period, outperforming the index.

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