This article has been written by Diana Crawford, a Morningstar contributor. It was originally published on the Morningstar Canada and Australia websites.
Dramatic changes have been happening in India since the election of Narendra Modi as prime minister last year, says David Kunselman, senior portfolio manager at the Canadian-based firm Excel Investment Counsel Inc.
"For the first time in over 30 years, India has a full majority government with an actual pro-business leader," says Kunselman, whose company specialises in emerging markets. "The party's huge win was a transformation for India and that's why global money managers are looking at India as a huge turnaround scenario."
Modi has already made dramatic changes and updates in a country that suffered from policy paralysis, says Kunselman. His pro-business initiatives include deregulating diesel prices, simplifying labour laws and land-acquisition transactions, and streamlining many financial regulations.
"Modi sees the opportunity of what China has done over the past decade," says Kunselman.
For example, one of the things that China has done is urbanise the economy to 53% from a dominantly agricultural country. India is only 30% urbanised. Part of the urban initiative in India is to support businesses, drive consumer spending and enhance people's capacity to increase wealth.
Realising that "they don't have the infrastructure for the backbone of this," says Kunselman, the Modi government launched the "Make in India" programme in 2014. The programme's stated goal is to transform the Indian economy into a major global manufacturing hub.
Modi also reduced the number of ministries, so as to be able to push different infrastructure programs through faster and with less bureaucracy to deal with.
The Modi government's ambitions for expansion of its infrastructure include building 30 kms of roads daily and expanding the railway network. The goal is to connect cities and manufacturing hubs, and pave the way for increasing exports.
The new leadership makes extensive use of the internet to stay in touch with voters. For example, the government provides weekly online updates on what it's working on, and on its long-term plans. As well, a lot of regulatory requirements are now being met by filing a single document online.
"They're taking out old corrupt ways," says Kunselman. "(Requirements are) being standardised on the internet so that everybody understands the rules of the game."
Excel India, which Kunselman oversees from Excel's head office in Mississauga, Ontario, is aiming to capitalise on many of the new Modi-led initiatives. The sub-advisor of the fund is Birla Sun Life Asset Management, based in Mumbai.
The fund's most favoured holdings are:
Axis Bank
Among the fund's top five holdings is Axis Bank. Retail banking is among the financial services segments with significant growth potential. Only one third of people in India have a bank account, out of a population of 1.2 billion. Under the Modi regime, bank accounts are becoming much more widely held. Since Modi assumed power in May 2014, there have been 125 million new bank accounts opened, Kunselman says.
Muthoot Finance
This gold financing company is another favoured holding. Many individuals in India still use gold jewellery as a form of savings. "This is a company that provides personal and business loans secured by the jeweller," says Kunselman, "so it's a different kind of finance company."
L&T
On the infrastructure side, Birla Sun Life likes Larsen and Toubro, a large engineering and construction company. "This plays to the infrastructure initiatives in the economy," says Kunselman. Diversified among large-scale engineering projects, the company manufactures heavy machinery and builds chemical and pharmacy plants.
Infosys Technologies is among the IT companies that Excel India holds.
"They're benefiting from the outsourcing of technology needs," says Kunselman, "and they basically have a cost advantage versus other parts of the world."
Overall, Kunselman expects India will benefit from its youthful demographics, with an average age of 27. Financial services and consumer stocks are especially expected to benefit from this growing workforce and its needs and desires.
Kunselman says market fundamentals in India are improving and the return on equity is very high versus other markets in the world. So much so that when things are going well, "India can generate some very strong returns".
Even so, it's still early in the transformation process.
"Maybe what some people would question is whether Modi's delivering on what he's saying," says Kunselman, "and maybe it's too early to tell at this point. So I think that's what the stock market is going to be watching as well."
