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Notes From Mumbai: Investigating an Economy on The Rise

April 23, 2024

Notes From Mumbai: Investigating an Economy on The Rise

April 23, 2024


In Change, Opportunity

When constructing portfolios, it is important to have a worldly perspective. It comes as no secret that investment opportunities are not limited to any particular geography, but one must also remember that economies change. Established economies may experience hiccups, temporary or otherwise, while developing nations may evolve into legitimate economic powerhouses.

Emerging Markets (EM) are currently experiencing such as momentous shift. China’s emergence as an economic superpower to rival the United States has been one of the major market stories of this century. Recently, however, it encountered several unforeseen bumps in the road. In the long run, we continue to believe that China’s economy and markets will outperform relative to most other emerging markets. At the moment, however, China is still dealing with the ramifications of COVID-related supply chain bottlenecks that prompted companies to adjust their supply patterns, shifting trade away from China. The property sector also continues to be a drag on Chinese growth. Those developments have created opportunities for other emerging markets—especially India.

I recently travelled to Mumbai to explore and evaluate these opportunities first-hand. What I learned is that while economic development is a gradual process, change is already evident everywhere you look—from roads and bridges to hotels and shopping malls, and even in the clothes people wear.

Change is already evident everywhere you look—from roads and bridges to hotels and shopping malls, and even in the clothes people wear.

What Makes India Stand Out

India is not the only country to have benefitted from recent shifts in global trade—Mexico, for instance, has profited from increased domestic production. Where India stands out is its population, both in terms of size and demographics. Not only is it now the most populous country on Earth,1 but crucially, it is a young country with an emerging middle class. Compared to aging countries like Japan and even those of North America, much of India’s population is in the prime of their working and wealth-building years, which is a great boon to productivity. Additionally, India benefits from relative political stability. When a company invests in an economy, it wants to know that the economy won’t change overnight. Recent tension with Canada aside, India has largely managed to stay out of the geopolitical crossfire. That continuity makes India attractive compared to many other developing countries.

Indian GDP Growth Projections Outpace China, Keep Increasing

Population Growth Supports Continued Momentum

A bar chart showing GDP growth projections for various regions at various points in time over the past two years, with India’s projection steadily increasing
Data as of December 21, 2023. Source: IMF, ABSLAMC Research.

In Mumbai, Growth is Everywhere

My recent visit to India was the kind of fact-finding mission we like to make before implementing a strategic change in our portfolios—a chance to investigate opportunities up close and in-person. I’d been to India on numerous occasions previously, but this was my first visit post-pandemic. The difference this time was palpable: while poverty is still very much evident, so is the growing middle class. On the street, young people are increasingly wearing brands that you’d commonly see in North American cities, including luxury names like Louis Vuitton and Versace; it reminds me of China’s economic awakening many years ago. Big-name hotels, restaurants, and retail brands are also increasingly visible. Obviously, they’re seeking to grow their business, but they’re also seeing something in India specifically that makes them believe it is a market worth investing in.

During my week in the country, I met with representatives from both the Prime Minister’s Office and various companies, and also spent some time traveling around the region. One of the most obvious and welcome changes since my previous visit had to do with transportation infrastructure. Quite often, bodies of water like bays and inlets (Mumbai is a coastal city) meant that travelling around the area by car was extremely time-consuming, as you’d be forced to drive all the way around the water in order to get where you were going.

Now, new bridges like the Mumbai Trans Harbour Link—which opened in January 2024—allow people to get from point A to point B directly; what may have been a five- or six-hour drive now only takes one or two hours. Not only is it more convenient, but it is also a game-changer for productivity and consumer spending—people can get to work quicker, and they also spend less of their time commuting, meaning that they have more time to go out and spend. That helps make companies stronger and more profitable, which in turn leads to more new jobs and higher wages, which then feeds back into greater consumer spending. It’s what economists would call a “virtuous circle.”
New Bridge Dramatically Reduces Travel Times
Based on Google Maps estimate, as of April 15, 2024, at 8:00 PM local time.
A daytime picture of the new Mumbai Trans Harbour Link bridge
Mumbai Trans Harbour Link

On one occasion, after a meeting with representatives from a real estate development firm, we stopped off to see one of their properties, a large shopping mall. They explained that while they originally purchased the property simply to operate the mall, they also bought all of the surrounding land. They were initially unsure what to do with it, but when the mall became a big success, they expanded its footprint. At the same time, they realized that the mall was beginning to feature higher-end retailers, and that a hotel attached to the property was not living up to that standard. Now, the site features a higher-end hotel brand as well as a restaurant and banquet hall. It’s become a massively profitable enterprise. When we visited, it was around one o’clock in the afternoon on a work day, but it was busy nonetheless—which tells you that people have money to spend and are eager to do so, even if it’s on their lunch break.

Signs of change were also evident at the hotel I stayed at. The service was impeccable, but what struck me most were the people in the lobby and restaurant. There were, of course, many tourists, which is unsurprising at a hotel. But there were many Indians there as well, having a bite or taking business meetings. Notably, these meetings weren’t just comprised of locals only—when I chatted with them, I discovered that they were diverse groups that included people from all over the world, including Indians, Canadians, Americans, and Europeans. It was first-hand proof of the way businesses are expanding into other geographies, and into India specifically.

India as a Long-Term Allocation

How will a rotation to India play out? As became obvious during my time in the country, many multinational corporations—the kinds that may have already expanded into China and are now exploring opportunities elsewhere—are already expanding their footprint in the region, with plans to grow further. The Financials and Fintech sectors are particularly primed for growth: digitization in the form of unified payment interfaces (UPIs) is bringing more people into the financial system and allows for better transparency, while in 2023, India received the world’s third-largest flows of FinTech startup funds.2 China, in our view, isn’t going anywhere—it’s still a strong market with great potential for growth. Recent headwinds, however, have provided India with a chance to accelerate its growth. At present, we view the Indian economy as being analogous to China perhaps 10 or 15 years ago, and our expectation is the shift towards India will only pick up more steam over time. To be sure, other countries—including Taiwan, South Korea, and Mexico—are also benefitting from China’s “pause,” as one might call it. Demographics and geopolitics, however, mean that India likely has the best long-term growth potential among those emerging markets.

Given these tailwinds, we do not view India as a near-term investment. Rather, we see it as a strategic allocation within EM—a long-term, increased exposure that we believe will be additive to our portfolios. There is the risk that valuations could get too expensive in the short run. However, given our long-term outlook, we are not concerned with trying to tactically time the exposure.

Within our portfolios, we plan to allocate approximately 25% of our EM exposure to India going forward. That’s roughly double what our exposure to India was before this year. We aren’t favouring any particular sectors of the Indian economy—we prefer broad-based exposure to the economy itself. It is worth noting, however, that one of the trends we’re seeing in India is a shift in consumer spending from Staples to Discretionary. This is the opposite of the trend in many developing economies, where the strength of the consumer is gradually weakening, and represents an opportunity to diversify.

We remain fairly bullish on China’s long-term growth, and it remains our largest exposure within EM at present. In the longer term, however, we would not be surprised if our allocation to India eventually exceeds our allocation to China.

Please contact your BMO Institutional Sales Partner for additional market insights.

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