Could India be the next EM superpower?

As China contends with a clouded outlook, portfolio manager unpacks her India investment thesis

Could India be the next EM superpower?

For decades, China’s phenomenal growth pushed it miles in front of its emerging-market peers, to the point where it challenged the U.S. in terms of sheer economic strength.

But three years after the Covid-19 pandemic, its standing as a pillar of the global economy is in doubt. Geopolitical tensions, reports of an ailing property sector, and concerns over youth unemployment are just a few of the shadows hanging over the proud Asian nation.

That begs the question: if China is no longer the world’s leading emerging-market power, which country could be next in line?

“Among the emerging markets, India is the one that always comes up as the next China,” says Christine Tan, portfolio manager at SLGI Asset Management, Inc. “From a population perspective, only India can really match; in fact, its population recently surpassed China.”

The ‘Made in India’ multiplier

Peering through a demographic lens, she says India today is a younger country than China, thanks to the former’s higher birth rate and more lax policy around population control. That’s translated into a richer demographic dividend, with the number of young people coming into the workforce expected to outpace older workers greying out.

“That's a very powerful demographic force, because it means you're going to continue to have strong consumption, production capacity, the potential for productivity to continue to increase … companies are going to continue to be able to add value,” Tan says.

Another point in India’s favour is its bright manufacturing outlook. The government has steadfastly thrown its support behind “Made in India” initiatives, including incentives for global companies to build capacity in high-value-add sectors to address local consumers.

That focus on the domestic market – as opposed to manufacturing goods for export – sets up a positive multiplier dynamic of local jobs helping to produce goods for local consumption, which in turn grows the revenue base for India’s economy, Tan says.

Year-to-date, she says India has exhibited solid economic performance in a number of ways. With the potential to achieve between 6.5% and 7% growth annually, it’s on course to become the world’s third-largest economy by 2027 by some estimates. Tan also cites the country’s credit growth, which speaks to growing confidence among consumers and companies alike.

A granular growth opportunity

In terms of valuations, she says India has tended to be more expensive than many other members of the emerging-market space. That might give pause to investors looking for growth at bargain prices – but not for those willing to do some digging.

“Some portfolio managers will say in a world where growth is becoming more and more scarce, other than in certain pockets like AI and bitcoin, we’re willing to pay a bit more,” Tan says. “We would say India is a market where you need to take a bottom-up investment approach.”

Data from Bloomberg, she adds, shows that India now has the world’s fifth-largest stock market in terms of market capitalization, lagging behind U.S., China, Japan, and Hong Kong. That means for investors looking to cast their nets across the globe, Indian companies should come up on the radar soon.

“Whether it's looking from the economic outlook, the demographic dividend perspective, or just the growing share of global investable dollars, India looks interesting,” Tan says. “But it’s definitely a market where you need to be granular, because valuations can be quite expensive.”