INCO - INCO: Investing In One Of The World's Top Consumption Narratives

2023-08-08 00:22:10 ET

Summary

• India's equities have shown stability and outperformed other emerging markets, making it a top-performing market.
• The Columbia India Consumer ETF provides exposure to India's automotive and consumer industries.
• India's demographics, including a young population and growing middle class, make it an attractive market for MNCs and potential for increased consumer spending.

Opportunity Overview

Equities in India have been a beacon of stability with MSCI Emerging Markets in the past decade. The MSCI India Index has only had negative performance for one year since 2012 ( -1.6% in 2015 ), and it outperformed MSCI Emerging Markets by over 13 percentage points last year. India still has many catalysts ahead of it in 2030, and this could be one of the top-performing larger emerging markets this decade.

India is currently the world's most populous country , as it recently overtook China in 2023. It boasts one of the world's most interesting middle classes, which could help support earnings growth in the market moving forward. Morgan Stanley projects that India will surpass Japan and Germany by 2027 and become the world's 3rd largest economy . India has had consistent growth in the past decade, and its economy has expanded by more than 6%/year in the past decade.

If India continues to absorb manufacturing activity from other peers in Asia, it could enter a new growth phase this decade. It is worthwhile to add exposure to India, especially ETFs that target consumer companies in India. Consumer companies in India have significantly outperformed other emerging markets.

The Columbia India Consumer ETF ( INCO ) provides exposure to leading consumer companies in India. This ETF has trounced other emerging markets in the past decade. This ETF is a superior vehicle, but it is crucial to monitor approaching headwinds and to be cautious of its relatively higher valuation.

India and other Emerging Markets

India could eventually become one of the largest constituents in the MSCI Emerging Markets Index, which would bode well for the equity markets.

India is currently the 3rd largest country in the index, and accounts for around 14% of the entire index. More active funds, including non-emerging market funds, may begin to target this country because of the economic reforms and growth potential.

Morgan Stanley recently changed its rating for India to overweight . It is very likely that many global macro funds may shift their focus to India, which arguably has one of the most attractive demographic narratives within MSCI Emerging Markets. Consumer stocks are an obvious target, as many investors are bullish on India because of the demographics.

The Indian Consumer

India has one of the most interesting and rapidly growing consumer markets in the world.

Over half of India's population is 30 years or younger, and the average median age is around 29 years old. India's economy has been a target for MNCs targeting low income, rural populations in populous countries. The country's urbanization growth has been relatively slow , and many key consumers live in rural areas.

The country's total consumer spending has the potential to increase 4x by 2030 .

India's middle-class share rose from 14% in 2005 to 31% last year. The country's favorable demographics and relatively lower wages make India a great candidate for companies that are now more comfortable hiring remote workers post-Covid. India already has an established benchmark of success in this area and could continue to grow as outsourcing labor becomes more common.

Exports and IT Growth

India is currently ranked 14th globally for its export market share and recently became one of the top 5 global economies. India has the potential to, like many Southeast Asian countries have in the past decade, enter into an export fuel growth phase this decade. Its trade to GDP ratio is still extremely low by regional standards. India has the potential to boost its electronics export growth, and to produce more electronics for its domestic population .

India has the potential to continue expanding into higher growth/technological areas, which could help boost middle class incomes in the country. While India's IT industry has typically spearheaded growth, often growing at twice the rate of the economy, there are also other emerging industries that could help India deliver solid, long-term growth.

As many countries began diversifying manufacturing away from China, India is positioned to capture some of this growth. Moreover, it also has the ability to take away export market share in lower end areas, as wages in India are also relatively low.

India's move to cut corporate taxes in 2019 has helped it begin making many of these transitions. The government has also provided numerous incentives for companies this ETF invests in, including automotive companies.

All of these developments will help to elevate the socioeconomic status of consumers in India, which should bode well for consumer stocks as incomes in India rise .

ETF Overview and Outlook

This ETF has a stable history of outperformance in the last decade and provides investors with some of the most salient consumer themes in India. This ETF invests solely in consumer staples and consumer discretionary companies in India.

This ETF invests in 30 companies and charges a net management fee of 0.75%.

It has substantially outperformed Columbia's other emerging market consumer focused ETF in the past decade. India consumer stocks are positioned to continue performing well this decade, and this ETF is a great hold at the moment.

Moreover, it has also outperformed other India focused ETFs/funds in the past decade.

This ETF invests its assets in high growth themes like automotive (vehicles and components), food and beverages, tobacco, personal care, leisure and retail.

Automotive

ETF invests around 37% of its assets in India's automotive industry. This industry has ample potential for growth this decade because of its export potential and ability to serve the underreached domestic market.

India's automotive industry has ample growth potential, as there are not very many cars per capita in the country. The number of cars per 1,000 people is projected to reach 72 per 1,000 by 2025 (up from 22 per 1,000 in 2018), which is still low by global standards. This industry can grow through a healthy combination of companies satisfying domestic and international demand.

India already has one of the world's top 5 largest automotive manufacturers and has ample growth potential moving forward.

India's automotive component manufacturing segment is also positioned for long term growth, as companies begin to increasingly source local components. The recent PLI Scheme also encourages investment in the automotive sector and will be valid through 2027.

Food Products and Personal Care

These two segments collectively account for over 30% of this ETF's assets. This does not include other consumer themes like beverages, tobacco and other consumer staples. Stocks in this industry could outperform in the coming decades, as many industries in India have the potential to grow rapidly this decade.

India's beauty and personal care market is the world's 8th largest market and is projected to grow by over 6% through 2028 . Growth was also favorable during Covid, as many companies adapted digital strategies to reach consumers. India's market is still only around 1/5 the size of China's market.

India's food and beverage industry also has very favorable growth prospects. Mordor Intelligence projects that this industry will grow by 10.68%/year through 2028. Nestle plans to invest $500 million in India through 2025 due to the strong growth potential of India.

Risks and Other Factors to Note

Below are some of the main risks/reasons to wait that I see:

1) Valuation : This ETF trades at a considerable premium (over 40x earnings) to MSCI India. The market in India, in general, is not overvalued relative to other emerging Asian stock markets. While consumer stocks should trade at a premium to the general index, the valuation is still relatively high.

2) EM Sentiment : Emerging markets will likely be vulnerable this year, especially as food and energy inflation has rebounded in recent months. Consumer stocks offer a reasonable inflation hedge in the long run, but in the short term larger emerging markets could be vulnerable this year.

3) Global Growth Outlook : This is still a relevant threat for India, even though its economy is less dependent on exports. Many of the catalysts I mentioned are long term trends.

Other funds, such as the India Fund ( IFN ), could be a safer bet in the short term. In the long run, this ETF is likely the best option to own in an EM bull market, as many of the industries this ETF invests in could have double digit growth rates. This ETF also has a stable benchmark of outperformance relative to the MSCI India Index.

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