The Awakening of the Sleeping Tiger

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David McLeish, Senior Portfolio Manager

Indian Bengal Tiger

We have long admired the potential India possesses. But until recently, the once aptly named “Sleeping Tiger” economy appeared to be hamstrung by structural issues most believed were insurmountable.

Indian Bengal Tiger

That was until the arrival of Narendra Modi. The BJP’s party crushing victory in the 2014 general election provided the ideal springboard for new Prime Minister Modi to launch his ambitious reform agenda.

Looking back over these last four years, this once digitally regressed and highly corrupt economy with dilapidated infrastructure and an almost non-existent rule of law has undergone truly transformational change. Aimed squarely at addressing these previously mentioned deep-seated handbrakes on the economy, Modi’s progress has been nothing short of astonishing.

On the ground in India

Eager to appreciate the opportunities these reforms might offer, we undertook our first on-the-ground research trip in March. As I zig zagged my way across this huge country the sense of opportunity was overwhelming.

The demographic changes taking place in India are profound. Powered by a rapidly rising middle class, which is expected to double from 270 million people to 550 million people by 2025, the potential growth consumption is astounding. Over the next seven years the purchasing power of the economy is estimated to rise by a whopping US$3 trillion.

In a predominantly cash-based economy, the fruits of this mega-trend may seem a long way off. But with the introduction of a state-of-the-art, digital biometric identification and electronic payments system called Aadhaar, 95% of India’s population now have bank accounts. This mobile-driven bank account is sophistication no other country in the world has on this scale. It allows people to transfer money and purchase services directly from the users’ phone. This is truly revolutionary stuff and the banking and insurance industries stand squarely in the centre of this new financial eco-system.

A modern infrastructure network has always been an integral part of any countries economic progress. This is a fact clearly not lost on Prime Minister Modi and ambitious plans are already in the pipeline, pun intended.

The Outlook for Growth

Over the next five years the plan is to build 84,000kms of new roads. That's enough roading to circumnavigate the world, twice. Public Private Partnerships are already moving this plan forward and, following the ironing out of some major wrinkles around the tender process for these contracts, it seems that the returns on offer for industry participants now look to have turned favourable.

Busy Street in Kolkata

Airports are another key part of the required infrastructure. It was evident throughout my travels that Indian tourism is booming. So too is domestic business travel. Having met with the management of India’s two largest and award-winning airports, Delhi and Mumbai, during my trip it is clear this an industry deep in expansionary mode. Strategically important assets are being created here and we believe partnering with the companies that are building these makes great investment sense.

Another area of focus is India’s depleted haulage network which required urgent attention. With this competition amongst state governments for the resources required to carry out all this infrastructure work has begun to grow. At the centre of this struggle are the steel and energy sectors.

During the trip, I spent time with key players within both of these industries and while the outlook has vastly improved a series of capacity, environmental, and trade-related issues saw a number of smaller, over-leveraged players end up in the countries recently established bankruptcy tribunal. These industries are in the process of consolidating and more robust companies will emerge. Once this is complete, the investment opportunity will be clear.

As a global fixed income investor, we scour the world looking for opportunities to lend capital to worthy borrowers at attractive terms. It is this journey that has thrown up many notable opportunities over the years. But as I see it here today, India is undoubtedly the most exciting opportunity in the world right now.


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