An interesting update from Gabriel Sacks, Co-Manager of abrdn Asia Focus plc. as he reminds wealth managers of the value that exists in smaller companies in India – a country which continues to ascend the ladders at pace.
It does not take a great deal of imagination to think of investing as a game of snakes and ladders. As compliance departments the world over like to remind us: “The value of investments can go down as well as up.”
The hope, of course, is that the ladders will be much more numerous and far lengthier than the snakes. From an investment perspective, this usually requires a strong growth story with an array of underlying drivers.
Few markets fit this mould more impressively today than India. The country where the game of snakes and ladders was invented many centuries ago is now the world’s fastest-growing major economy.
According to World Bank data, India’s GDP rose by 7.6% in 2023. This compared with 5.2% for China, 2.5% for the US and – with apologies to those of a nervous disposition – 0.1% for the UK[1].
With similar momentum predicted for the years ahead[2], India is now tipped to overtake Germany and Japan to become the third-largest economy on Earth. It is expected to achieve this feat by 2028[3].
There are several widely acknowledged reasons for investors to believe in such a trajectory. They include the depth of the domestic capital market, the scale of infrastructure improvement, the ongoing rise of middle-class consumerism and the transformative reach of digitisation.
Perhaps less appreciated, though, is the role of smaller companies in fuelling growth from the bottom up. At present, as specialist investors in Asian equities, we are unearthing more of these hidden gems in India than anywhere else.
India’s underappreciated engines of growth
Irrespective of geography, smaller companies tend to be more agile than their larger counterparts. This should mean they are better equipped to respond to – or even to spearhead – innovation-led disruption.
Small-caps throughout Asia have demonstrated this advantage by materially outperforming large-caps over the past three to five years[4]. Many have prospered amid the increasingly rapid development of emerging markets (EMs).
Yet such businesses routinely escape the attention of most investors. This is often because investment analysts’ coverage of them is at best extremely sketchy and at worst non-existent.
Hundreds of analysts might scrutinise household names in markets such as the US and Europe. By contrast, only a handful – or maybe even none at all – are likely to “eyeball” small-caps and mid-caps in EMs.
This is why the expertise of specialist investment teams can make a significant difference in identifying opportunities at the lower end of the market-cap spectrum in these markets. So can face-to-face engagement.
For example, we met with more than 25 Indian companies in the run-up to the nation’s parliamentary elections earlier this year. Our discussions with management teams provided valuable insights into individual businesses’ outlooks, not to mention India’s prospects as a whole.
Our positive view is reflected in the fact that India – principally represented by its smaller companies – currently accounts for more than a quarter of abrdn Asia Focus plc’s holdings. The fund’s benchmark, the MSCI AC Asia ex Japan Small Cap Index, has an even higher weighting[5].
Diversifying beyond China
The world’s second-largest economy, China, recently unveiled an ambitious raft of stimulus measures. They include more spending, a relaxation of home-buying restrictions and a renewed commitment to cutting-edge technology.
Such moves have revived broader investor interest and encouraged disciplined stock-picking. Yet China’s weighing in both abrdn Asia Focus plc and the fund’s benchmark index remains modest in comparison with India’s[6].
Why? To some extent, the argument for favouring India boils down to lingering doubts around China’s own growth story – which, although still worthy of attention, has stumbled of late.
Meanwhile, India’s ascent has been both near-relentless and spectacular. By way of illustration, the International Monetary Fund has reported that India was responsible for 16% of all global growth in 2023[7].
To return to our board-game analogy: at least relatively speaking, China has been battling to avoid sliding down the snakes. India has continued to ascend the ladders at pace.
Said to have been devised by 13th-century philosopher and yogi Sant Dnyaneshwar, one of the original versions of snakes and ladders used a board populated by virtues and vices. Landing on the former elevated a player closer to enlightenment, while landing on the latter meant slipping further away from it.
Even for those who recognise smaller companies’ contribution to the economy’s success, investing in India hardly qualifies as a form of spiritual awakening. But it might just raise your portfolio’s performance by a rung or two.
Gabriel Sacks is Co-Manager of abrdn Asia Focus plc.
[1] See, for example, World Bank Group: “GDP growth (annual %)”, as at December 31 2023.
[2] See, for example, World Bank Group: “India’s economy to remain strong despite subdued global growth”, September 2 2024.
[3] See, for example, EY: “India – towards becoming the third-largest economy in the world”, August 25 2023.
[4] See, for example, abrdn: “Asian smaller companies: the power behind the throne”, April 29 2024.
[5] Figures as at September 30 2024.
[6] Ibid.
[7] See, for example, World Economic Forum: “India could become the world’s third-largest economy in the next five years. Here’s how”, January 15 2024.
