Vincent Lagger, co-fund manager of JB Chindonesia Fund at Zurich-based manager Swiss & Global Asset Management, tells WealthBriefing why India makes a surer bet than China for private investors.

Vincent Lagger

Vincent Lagger, co-fund manager of JB Chindonesia Fund at Zurich-based Swiss & Global Asset Management, tells WealthBriefing why for private investors, India makes a better bet than China. 

WB: Why are you bullish on India?

VL: The fundamentals are strong. While western economies digest the prospect of a double dip recession and have concerns over global growth, India’s gross domestic product is expected to grow by 7 to 7.5 per cent during the fiscal year ending April 2012 as a result of demographic trends, robust domestic demand and a sound banking system.  The economy was resilient during the 2008 recession and has continued to grow at a healthy rate. India will become more reliant on domestic growth drivers compared to previous years, and its growing middle class should drive demand.     

WB: How is a growth in household wealth affecting the Indian economy? 

VL: The prospects of the rural economy keep improving, thanks to labour reforms and rising farmers’ incomes. While local needs are huge, production remains fragmented, restricted by low investment and logistic issues. However, crop diversification, irrigation, seed technology and government minimum prices have already beneficially affected farming yields over the last few years. As a result, purchasing power is passed down to farmers and the consumption boom experienced outside urban areas are already supporting many industries: for instance demand for cars and motorcycles keeps booming as affordability improves and sensitivity to interest rate hikes remains very low.

WB: Would you favour investing in India over China?

VL: Most economists agree that India is more advanced than China when it comes to economic reforms. India’s capital markets are gradually opening, partly motivated by the need to develop bond markets and facilitate huge infrastructure financing needs. India boasts a private-sector banking system where market forces, not government intervention, fix the price of money and allocate capital. Thus, credit can be routed to consumers instead of supporting state-owned enterprises and government projects alone.

WB: What about the risks of inflation to the Indian economy?

VL: Over the last few months, cyclical headwinds intensified subjecting the Indian economy to stubbornly high inflation and a liquidity squeeze. While inflation fever typically finds its roots in food and fuel price surges, the poor state of the local infrastructure and resulting high logistic costs compound the problem further. The absence of a prolonged slowdown during 2009 left the manufacturing sector with increasing difficulties in sourcing cheap labour, further adding to inflationary pressures. Aware of the overheating risks threatening economic stability, the Reserve Bank of India correctly shifted its focus from a pro-growth to an anti-inflation policy. Accelerating monetary tightening dramatically increased the cost of funding for banks and businesses but achieved the much needed impact on India’s economy: investment levels reduced, credit demand is finally moderating, and along with it, overall economic activity is falling to a healthier level..

WB: What are the long-term prospects for India?

VL: In times of global commodity volatility, India is of course exposed both on the public and private front: careful monitoring is required as government budgets could be squeezed through rising subsidy costs, and households could suffer from soaring living costs.

Despite the concerns for the global economy, India’s fundamentals remain strong and are backed by the robust profitability of Indian corporates, which is reflected in the valuation premium of the Indian stock market. However at around 13.7x next fiscal year earnings (post the current global sell-off), local indices are attractively valued compared to historic levels. Inflation pressures still represent a challenge, but the foundations are being laid everyday by millions of entrepreneurs ready to tap into what is expected to become one of the largest market places in the world. Free-market democracy and the entrepreneurial spirit of its population will help India’s future growth.