Despite recent market jitters and geopolitical flare-ups, Gabriel Sacks, Co-Manager of abrdn Asia Focus plc, argues that India’s long-term growth story remains intact. From its leapfrogging digital economy to the overlooked potential of smaller companies, Gabriel outlines why wealth managers should look beyond short-term volatility and stay focused on the structural drivers powering Asia’s most compelling investment opportunity.
A friend of a friend worked in India in the early 2000s. He held a senior role at a multinational company and so enjoyed a considerable array of perks, including two cars and two chauffeurs.
The first vehicle in his mini-fleet was a pristine Tata Sumo SUV, which was relatively modern and efficient. The second was a slightly battered Hindustan Ambassador saloon, which was based on a 1950s Morris Oxford and proved spectacularly unreliable in almost every respect.
His travails with the latter came to mind recently amid speculation over the health of India’s economy. Like the Ambassador’s temperamental power plant all those years ago – I use the word “power” loosely, of course – India’s growth engine seems to have lost some of its zip.
The first signs of a slowdown came towards the end of 2024, when equity valuations began to slide. This trend accelerated until the turmoil triggered by President Trump’s “Liberation Day” announcement prompted more investors to explore markets beyond the US.
With comparatively little reliance on exports, India was quickly identified as a would-be safe haven in the face of the tumult. But its investment appeal was arguably undermined anew soon afterwards – first by an easing in global trade tensions and then by an alarming border skirmish with Pakistan.
So where does the world’s fourth-largest economy stand now? Has India experienced a purely temporary wobble or are the wheels genuinely in danger of coming off?
As specialists in Asian equities, we see no grounds for summoning a flatbed recovery truck – particularly if investors recognise the important role played by smaller companies. Here are three key reasons why our confidence in India’s long-term growth story – unlike that hapless Ambassador’s careworn bodywork – is undented.
- The principal drivers of growth remain intact
India’s GDP rose by 7.6% in 2023, compared with 5.2% for China and 2.5% for the US. The figure for 2024 was less impressive – 6.2% – but China, at 4%, and the US, at 1.8%, still trailed by a distance.
In other words, despite an occasional blip, India still ranks as one of the fastest-growing major economies. It remains on course to overtake Germany and become the third-largest economy in the world by 2028.
Several factors are driving this trajectory. They include broadly solid geopolitical positioning, the expansion of the middle class, ever-greater consumerism and the stability brought by a deeply integrated domestic market.
On balance, while a degree of trade uncertainty persists almost everywhere, we believe India is set to benefit from any new tariff regime. In our view, it is likely to attract investment at the expense of a number of its regional peers.
- India is the world’s most effective leapfrogger
Few nations are better placed than India to bring about the infrastructure transformation needed to keep pace with the relentless march of technology. Its advantage in this regard lies in the phenomenon of “leapfrogging”.
Like many emerging markets (EMs), India missed out on some of the biggest technological breakthroughs of the 20th century. This was once a source of exclusion, but now it is instead a platform – in effect, a blank canvas – for sweeping, positive disruption.
Mass adoption of the cutting-edge Unified Payments Interface offers a compelling illustration. The system, which uses mobile phones to facilitate inter-bank transactions in real time, has fuelled a tremendous cascade of innovation around India’s burgeoning hyperconnectivity.
This is giving rise to an array of investment opportunities in areas such as consumer intelligence, digital services and big-data solutions. All the evidence indicates the ongoing revolution, in keeping with the leapfrogging concept, will continue to progress in leaps and bounds.
- Smaller companies offer enormous long-term potential
If the Hindustan Ambassador was a relic from India’s colonial past, the Tata Sumo was a taste of the country’s entrepreneurial future. Lest we forget, Tata now owns multiple automotive brands – including Jaguar Land Rover, which it purchased from Ford for $2.3 billion in 2008.
So how do investors discover the Tatas of tomorrow? It is not a straightforward task, as smaller companies in India tend to be under-researched and rarely feature even on the radars of most investment analysts.
This is where specialist teams with local knowledge and on-the-ground expertise can make a difference. In India, as in many EMs in Asia, in-depth research and face-to-face engagement are often vital to unearthing the hidden gems that lurk at the lower end of the market-capitalisation spectrum.
India currently accounts for more than a quarter of abrdn Asia Focus plc’s holdings and four of our top 10 stocks . In our opinion, smaller companies represent the underappreciated heart of the economy’s long-term growth engine – one that we expect to run and run.
Gabriel Sacks is Co-Manager of abrdn Asia Focus plc.
