India: fund ideas for investors’ favourite emerging market

• 19 out of the past 24 months has seen net outflows from China, compared with just two for India, which boasts 22 months of inflows
• Net flows into other emerging markets such as Brazil and South Korea are from a lower base and have remained steady over the period
• Alex Watts, ii’s Fund Analyst, outlines funds to invest in India and China

While the Indian elections are ongoing (concluding at the start of June), customers of interactive investor, the UK’s second-largest direct to consumer platform for private clients, have already voted in favour of the region in recent history.

Trading volumes (by value) into India-centric funds, investment trusts and exchange-traded funds available on the ii platform have risen 26-fold over the past two years to 30 April 2024, and 21-fold over the past year alone.

India is the most-popular emerging market region for investing among ii customers, attracting more money from investors than China, the next most-popular region. Nineteen of the past 24 months have seen net outflows from China, compared with just two for India, which boasts 22 months of inflows.

In comparison, China-centric investments have experienced a 13-fold decrease over the past two years (to 30 April 2024) and are down six-fold over the past year.

Net investment flows into other emerging markets such as Brazil and South Korea are from a lower base and have remained steady over the period, with no discernible trends.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “When it comes to investing in emerging markets, for private investors it is a two-horse race between India and China. The others don’t come close. But India has emerged as the frontrunner in recent history, with net flows into India-centric investments far outstripping the figure for China-centric investments.

“Net flows into Indian investments from customers on interactive investor reached an all-time high in February this year and came close to that peak again in April. In contrast, the heyday for Chinese investments when it comes to net flows was January 2023. These investments have since experienced net outflows every month since then, except for November 2023.

“It is safe to say that shifting sentiment to both regions has pushed the pendulum in favour of one or the other over the years. In recent times, India has won the popularity contest among our customer base.”

Alex Watts, Fund Analyst, interactive investor, says: “India and China have experienced opposite fortunes over the past two years from an investment point of view. Over recent years, Indian equities have been one of emerging markets' strongest performers and is tipped to achieve real GDP growth of 6.8% in 2024, according to the International Monetary Fund's most recent projections, and is tipped become the third-largest economy by 2028, overtaking both Japan and Germany.

“India has cemented its status as one of the largest and fastest-growing economies in the world, bolstered by a suite of business-friendly reforms enacted by President Narendra Modi from an investment standpoint.

“The re-election of President Modi, something the market believes is a forgone conclusion, could serve to strengthen the nation’s long-term investment story. His victory would mark one of the longest periods of political stability since the nation’s independence, and his election pledges, including growing India’s GDP to $5 trillion (from $3.7 trillion) by 2027 and making further investment in infrastructure, bodes well from an investment standpoint.

“However, India is not immune to broader geopolitical challenges that have stoked volatility in stock markets across the globe. Another key risk is an uptick in oil prices could prove a problem for India, which is one of the world’s largest importers of oil.

“The robust growth of the Indian stock market has seen valuations become expensive in some cases. 12-month price-earnings ratios, a valuation metric, for MSCI India are above 10-year average and by far exceed valuations of other emerging market regions.

“However, India is now the world's most-populous nation with over 1.4 billion people, passing China in April according to projections by the United Nations - and it's still growing. The country's biggest asset is its young, vibrant and educated population. As their incomes rise, more young people move to the cities. Their lifestyles evolve as their aspirations grow. It has been estimated that India's middle class is expected to grow from around 50 million today to 475 million people by 2030.”

Fund ideas

Alex Watts says: “Indian equity market can be extremely volatile and for more risk-averse investors, a broader Asian or emerging markets funds that can adjust exposure to the country, are more appropriate to way to invest in the region.

“We like Pacific Assets Ord (LSE:PAC)trust (over 42% allocation to India), JPMorgan Emerging Markets Ord (LSE:JMG)trust (24%) and Utilico Emerging Markets Ord (LSE:UEM) (8%) that can adjust exposure to the country, as a more appropriate way to invest in the region.

For adventurous investors, Stewart Investors Indian Subcontinent Sustainability Fund is a good option for investors looking for India equity exposure with a sustainability focus. The fund invests in the highest-quality companies run by responsible management teams.

iShares MSCI India ETF USD Acc GBP (LSE:IIND) is easy option for passive investors. The ETF tracks the performance of an index composed of large and mid-sized companies in India.

China

Alex Watts says: “The investment environment in China has been torrid of late, in part given the property sector stress, regulatory environment and weaker than expected post-Covid macro data. The benchmark MSCI China index drew down over 16% through 2023, with the MSCI China SMID index losing nearer 21% in GBP terms.

“As Chinese equities broadly rerated downwards, the rift between developed market and Chinese valuations has widened. Since February, the market has experienced a rebound and a small uplift in valuations, although likely investors will have to see a sustained improvement in earnings for this to continue.

“As investors remain cautious, various government measures and monetary/fiscal policies have been taken to stimulate consumption and support markets. The market reaction to the targeted stimulus has so far underwhelmed, but the longer-term growth story for China remains intact.

“China is now an integral player in the story of global innovation and in supply chains of critical markets, such as EV production and clean energy supply. Further, the ascension of the middle class and the refocusing of China’s economy towards domestic consumption are expected to be key drivers of economic and market growth in coming years.

“Many investors will see the region as too volatile to invest, but some adventurous and long-term investors may be seeking to take advantage of the historic lows of valuations across the market. As it is the world’s second-largest economy, and home to fierce innovation in key industries, China is hard for investors to ignore entirely.

“While there are short-term challenges such as the property market crisis and geopolitical risk – the threat of potential conflict with Taiwan is a concern right now - improving fundamentals, and strong consumer and technological advancements will be key drivers of the market.

Fund ideas

Fidelity China Special Situations (LSE:FCSS), a member of ii’s Super 60, seeks undervalued Chinese businesses with long-term potential for capital appreciation. There’s a bias towards small/mid-cap, and the trust is permitted 15% in unlisted names, which it employs to access as yet unlisted innovative businesses. Where management perceive weakness of a company, short positions can be taken to profit from the predicted share price decline, though these are used sparingly.

For investors seeking sustainable opportunities in China, opting for an actively managed fund with diversified country exposure can help mitigate risks. The Fidelity Sustainable Asia Equityfund has a 26% exposure to China and leverages the highly experienced and well-resourced team to find companies that are more likely to drive positive sustainability outcomes across the region.