Recently returned from the subcontinent, Sadiq Adatia outlines why he sees a compelling investment case for India
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Recently returned from a trip through Mumbai, Delhi, Goa, and more rural parts of India, Sadiq Adatia believes that momentum is continuing to build for that country. The Chief Investment Officer at BMO Global Asset Management saw a developing nation that has continued its progress in growing a middle class, building out rural and remote infrastructure, and attracting foreign investment. That story has been in the zeitgeist for a long time, but even in the wake of a short-term energy shock and a medium-term trade shock, Adatia believes that narrative is largely intact.
Adatia explained how advisors and investors may want to play the ongoing momentum in India, while outlining some of the risks that could arrest that momentum, even temporarily. The ongoing conflict in Iran and closure of the Strait of Hormuz, through which about half of India’s crude oil, liquified natural gas, and liquefied petroleum gas are shipped, presents a short-term energy shock for India. Russian energy imports have become a bone of contention between India and the West, as well. Nevertheless, Adatia sees progress on global trade and a domestic development story that should keep investors interested.
“The key is that the momentum continues in India in terms of the longer term plan to continue to see growth, to continue to develop the economy and continue to build on infrastructure, to continue to develop the middle class,” Adatia says. “What I have heard from politicians, ministers and others in India a few years earlier, you know, transpired. So wasn't they were just giving me, you know, lip service. This is exactly what I saw.”
Foreign and domestic momentum
Adatia notes, too, that he saw a growing influx of foreign interest in India while in the country. From improving tourism infrastructure to a cohort of non-Indian businesspeople, he sees foreign interest as a driver for growth. In speaking with other foreign businesspeople, Adatia heard a willingness to expand into India, into regional centres that have not attracted the kind of foreign capital investments that hubs like Bangalore and Mumbai historically dominated.
While Adatia was in the country, India finalized its recent trade deal with the European Union, which local and foreign businesspeople greeted with celebration as it paves the way to a doubling of bilateral trade by 2032. He notes that other businesses, foreign and domestic, have expressed greater optimism about the country. He notes the example of Apple, which has diversified some of its supply chains away from China and towards India and says that more foreign companies are using India as something of a ‘China hedge.’
China’s rise in the 2000s could also be seen as a corollary to this moment in India, with a rising middle class and growing industrial base. Unlike China, however, Adatia notes that India has shown greater tech adoption rates at this point in its growth cycle. Even flea market vendors, he says, are using contactless POS systems. He also notes that India is trying to be more specialized than China has been. For example, Indian firms are not trying to compete with the US and China in the development of AI platforms. Instead, they’re specializing in implementation and application of AI.
That specialization, along with infrastructural development, a push for educational improvements, and a growing middle class consumer base should all help drive Indian momentum. That momentum, Adatia says, should result in Indian market outperformance over the next three to five years.
Risks to India: energy, geopolitics, and domestic drags
Because India’s growth story is so momentum driven, Adatia sees a wider risk in the prospect that momentum might be arrested. That could come from a slowdown in the way projects are completed, or snarls around sticky issues like rapid urbanization and costly traffic problems.
India’s energy trade with Russia has also been an issue for the country, inviting US pressure. Adatia notes, though, that India has long maintained more friendly relations with Russia and that it is unlikely to stop its Russian energy imports, especially as war in Iran constricts the flow of hydrocarbons from the Gulf that India relies on so heavily. What Adatia expects is that this trade becomes less public as India sees its interests in downplaying its Russian energy imports.
The ongoing closure of the Strait of Hormuz is, in Adatia’s view, a big short-term risk. While he remains bullish on emerging markets as a whole, a sustained rise in the price of oil could derail that viewpoint. Adatia notes that even if the war ends today and the straits reopen, there will be a lag in achieving the production levels needed to bring global oil prices down. He believes that, in the short-term, caution is warranted.
From an investor’s standpoint, Adatia notes the risk that comes from Indian equity markets’ tendency to swing somewhat. Indian equities underperformed the rest of the emerging market space last year, largely because its stocks were seen as overvalued. Capital could also flow between India and China, causing momentum swings. Those swings, though, are largely to be expected and some of why he recommends strategic allocations to India be made with a longer time horizon.
How advisors can play the space
While Adatia says advisors and investors can gain exposure to India through passive tools, he holds to the idea that EMs should generally be accessed through active strategies. There are often company-specific risks that an index would gloss over but an active manager could unearth. He also believes certain sectors in India deserve overweights, such as consumer discretionary stocks, infrastructure, and financials.
Advisors should also caution against overreactions in their India allocations. Adatia believes that when it comes to this country, and emerging markets in general, a five-year view can be beneficial as it offsets our propensity to overreact. That strategic view can keep investors focused on the long-term narrative, which Adatia argues is strong.
“If you look at companies out there, they're looking to do more business with India as well. The trade agreements are a good sign that people do want to work with them,” Adatia says. “Think of this as a long term allocation, with momentum that's slowly building up in a developing economy that looks like China 10 years ago, but might actually go a little faster in the first three to five years than maybe even China did then.”
