So why India?

The pandemic ravaged India’s economy but it is now in recovery mode. The World Bank is forecasting India to surpass China as the world’s fastest growing major economy in 2022.

India is also entering a digital revolution. With over 800 million internet users, a number of Indian technology start-ups have announced plans to go public. Goldman Sachs analysts estimate nearly $400bn of market cap could be added from new Indian IPOs in the next three years. 

India looks like a hotbed for economic growth for decades to come. So how could I gain exposure to this explosive growth as a UK investor? I can actually look to the London Stock Exchange.

UK Shares with Indian exposure

JPMorgan Indian Investment Trust (LSE:JII) is the biggest Indian investment trust on the LSE by market cap so could be a first stop for investors stop me. It aims to outperform the MSCI India Index. But it has fallen short over the past 10 years. Other smaller trusts such as Aberdeen New India Investment Trust and Ashoka India Equity Investment Trust have performed better.

It was a FTSE 250 constituent until the pandemic sank the Indian economy into a recession. Its share price dropped 30% and the market cap of £412m was too low to remain in the FTSE 250. But interestingly, it is outperforming the FTSE 250 index year to date (18.5% vs 14%). It’s market cap has also risen to £640m and a return to the index may be on the cards.

The trust is trading at an almost 18% discount to net asset value and I believe it looks cheap. But I wouldn’t buy it at the moment as the track record against the benchmark is concerning. I would look elsewhere to capitalise on Indian growth.

An alternative investment trust

Pacific Horizon Investment Trust (LSE:PHI) intrigues me. Baillie Gifford manages the trust, as well as a number of popular entities such as Scottish Mortgage Investment Trust. The trust is up 23% this year and has returned an eye-watering 345% over the last five years.

It invests in Asia Pacific markets but Indian equities are a growing proportion of the portfolio. Indian companies make up over 20% of the trust today. Similar to other Baillie Gifford investment trusts, Pacific Horizon invests in private companies, including three Indian firms: Delhivery, a delivery e-commerce and logistics company; Dailyhunt, an online video maker; and Star Health, India’s largest healthcare provider. These investments could help to capture growth in India that other investment trusts can’t.

Chinese equities make up a little under 30% of the portfolio which may be a cause for concern. The fund provides exposure to Indian public and private companies but is susceptible to Chinese equity volatility and risk.  

Risks and rewards

There are unique geopolitical risks with India. Ongoing tensions exist with Pakistan to the west and China to the north. Additionally, currency risks are unavoidable when buying UK shares of companies with revenues primarily outside of the UK. The Indian government also need reforms to capitalise on the Indian economy’s potential. Despite the risks, I’m bullish on India’s growth and will be looking to build a position in the coming months. 

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Unlike open-ended funds, trusts tend to have a fixed number of shares in issue, which means the shares can trade at a premium, or discount, to the net asset value of the underlying investment business. Therefore, investors can buy the trust at a discount to its net asset value. 

Meanwhile, they also have more flexibility when it comes to dividends. Investment trusts can hold back a percentage of their revenues received every year. Managers can then use this at a later date to fund dividends.

These reserves were particularly handy last year when many companies cut their dividend payouts. Most investment trusts were able to dig into their reserves to fund their own dividends. 

These are some of the reasons why I like investment trusts. Here are two trusts I’d buy today for my portfolio. 

Investment trusts to buy

Another reason to own investment trusts is that they can offer a good way for investors to gain access to regions they may not be able to access on their own. The JP Morgan Indian (LSE: JII) is a great example. This company invests in a diversified portfolio of equity and equity-related securities of Indian corporations.

I think India has the chance to be one of the fastest-growing economies in the world over the next few decades. It has a young and growing population, with increasing education levels and growing wealth. However, I wouldn’t know where to start investing in the country. That’s why I’d buy JP Morgan’s Indian offering.

Its top holding is Infosys, a global leader in next-generation digital services and consulting with operations worldwide. It also has investments in Indian housing corporations, construction companies and banks. The investment trust currently trades at a 14% discount to its net asset value. 

This trust’s concentrated portfolio may put some investors off. For example, it has 20% of assets invested in its top two holdings. This high level of concentration could expose investors to risks and losses if the companies in the portfolio don’t perform as expected. 

UK focus

The other stock I’d buy for my portfolio of investment trusts is Mercantile (LSE: MRC). This investment firm has a UK focus. Specifically, the fund managers focus on buying mid-cap UK companies. Two of the top holdings are Bellway and Games Workshop. 

I like this trust because it offers the chance to invest in a diversified portfolio of mid-cap, high-quality UK growth stocks at the click of a button. The stock also currently offers a dividend yield of 2.4%. Further, it trades at a discount of 5% to the net asset value. 

This might not be suitable for investors who aren’t interested in the UK. Risks such as a sluggish recovery from the coronavirus pandemic and Brexit-related disruption could hold back the returns on UK equities as we advance. 

Despite these risks, I’d buy the stock from my portfolio of investment trusts. 

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Yet many have been sceptical about the future prospects of these emerging nations. There’s been much talk of a slowdown in China, and political in-fighting in India. But if we dig a little deeper, we find that the fundamentals are remarkably resilient: Chinese GDP has still been growing at 6.7% per annum, while India has been growing at 7.9%.

China and India: industrial powerhouses

The broad picture is that these countries are now industrial powerhouses, and they’re set to boom relative to more developed markets for decades to come.

Profitability at a range of companies in these countries has been surging. Take China Pacific Insurance. Net profits were CNY9.2bn in 2013, and this jumped to CNY17.7bn in 2015. Revenue increased from CNY193bn in 2013 to CNY246bn in 2015. These are startlingly strong numbers.

Or take India’s Infosys. Net profits were INR104bn in 2013, and this rose to INR136bn in 2015, while turnover climbed from INR493bn in 2013 to INR630bn in 2015.

Rank after rank of businesses has seen rapid growth in both revenues and earnings.

I’ve chosen to invest in these countries with two investment trusts: Fidelity China Special Situations (LSE:FCSS) and JP Morgan Indian Investment Trust (LSE:JII). How well have these done?

On 1 January 2016 FCSS was priced at 121p per share. It has now risen to 170p. That’s an increase of 40%. On 1 January JII stood at 477p. It has now risen to 641p. That’s an increase of 34%.

Why have the shares risen so much? Well, part of this is currency fluctuations. Since January the pound has fallen by about 10% against the yuan, largely because of the Brexit vote on 23 June.

And this is a great time to invest

Also, stock indices such as the Hang Seng and the Sensex have been on the up. Plus, these are well-managed funds that have produced better returns than the overall markets in these countries. What’s more, a substantial amount of gearing for Fidelity China has added to the growth.

Yet the amazing thing is, in terms of equities, we’re still really only at the end of a 17-year bear market, and the next bull market hasn’t even got underway. That means there are likely to be many more stock price rises to come. Thus, if you haven’t bought in yet, this may be a great time to get on board.

And what makes investment trusts like these even more attractive than standard funds is that they currently trade at sizeable discounts. The current discount on Fidelity China is 14.8%. While JP Morgan India is 10.2% cheaper than its net asset value.

That’s why I’ve invested a large part of my portfolio in these funds, and I think you should too. People are often afraid of the growing power of these emerging nations. But if you’re an investor considering buying into China and India, I would encourage you to make the leap.

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First, let’s think about the fundamentals. What determines whether a stock will rise or not? In one word, profitability. You need to invest in businesses that are likely to make strong earnings now and for years to come. You also want long-term investments that will trend steadily higher. Are these stocks that you can buy and forget about?

Go where the profits are

You need to consider where in the world the growth will be. Although you may know less about other regions, you need to be brave and look beyond the shores of the UK. And, wherever possible, think contrarian: when you genuinely believe in the prospects for a company, buy when others are selling.

Let’s look at the world today. The fastest growing economies in the world are emerging market economies. The two emerging engines of the world economy are China and India. The low salaries paid in these countries, combined with a highly skilled workforce, will produce a whole new range of global titans that will rake in the profits. Investing in these giants will be a key part of your portfolio.

There’s now a broad range of emerging markets funds, and I favour investment trusts in particular. Unlike unit trusts, investment trusts are listed on the UK stock market, and so can be traded like a common-or-garden share. Most emerging market investment trusts are now trading at a substantial discount, meaning you can buy them for less than their net asset value (NAV). This can add to your returns.

These are the picks

So, pick number one: Fidelity China Special Situations (LSE: FCSS). This is the leading China fund, and trading at a whopping 15.77% discount to NAV. The original Fidelity Special Situations was run by renowned fund manager Anthony Bolton and achieved an annual return of 19.5% over 28 years. Could Fidelity China achieve something similar? It just might.

Then, pick number two: JP Morgan Indian Investment Trust (LSE: JII). There are fewer options for investing in India, but this is the leading investment trust. And with a discount to NAV of 12.9%, again this is unduly cheap, and thus a strong buy.

Then, pick three: I would choose a few carefully selected UK companies with a large stake in the future. One clear trend is a boom in global consumerism. Another is growth in emerging market financial services. And another is the rising demand for healthcare services. Next is a global retailer that looks cheap at the moment. My contrarian instincts draw me to banks with a substantial business in emerging markets, such as BGEO and HSBC. And AstraZeneca is one of the world’s leading pharmaceutical companies. Pick a handful of these businesses for your portfolio.

Invest one third of your money in China, one third in India, and one third in these well-chosen British firms. Sprinkle well with cash, and wait, very patiently, for the bull market to get underway. In a few years, your investments should be blooming.

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Yet the India I remember from my visits to the country in past years seemed to be a bit of a mess. It was dirty, polluted and the infrastructure was terrible. Indians tended always to be late, and rather disorganised.

India is changing. And fast.

But this is changing. And fast. How quickly is apparent when you visit the country today. The infrastructure is already being transformed. A growing and young population means the economy is booming. Indian movies are now on a par with Hollywood. After I and my wife watch Hindi serials on TV, Western programmes seem to pale in comparison.

India owns Jaguar-Land Rover, Mittal Steel, Infosys and a host of other companies. But insiders will tell you that this is just the beginning.

30 years ago, China was seen as a backward nation whose economy was mainly based on agriculture, with very little in the way of manufacturing or services. At the time a round-faced politician with an endearing smile called Deng Xiaoping realised that China should become more like the West, and that you could still have a Communist political system alongside a capitalist economy.

You don’t need me to tell you the transformation that this nation has undergone since then. It is almost a cliché to say China will soon be the most powerful nation on earth.

This is why I have started to buy into India

Today India is run by a man in a neat white beard with glasses called Narendra Modi. He is a Hindu from Varanasi with a degree in political science and a (well-known) penchant for yoga. And I think he is India’s Deng Xiaoping.

I’m a firm believer that it would be naïve for investors just to buy shares in UK-based companies. After all, shares prices depend upon the profitability of companies. And that profitability will depend upon the strength of the nation’s economy, and it’s competitiveness. Right now, and for decades to come, India and China will be the strongest and most competitive nations on earth.

To me, it’s a no-brainer, and I plan to invest an increasing proportion of my cash in Indian shares.

Because this is the type of market which requires a lot of in-depth research, I would invest in unit or investment trusts rather than individual shares. Unfortunately, there aren’t that many good India-focused funds around at the moment, but my picks are J.P. Morgan Indian Investment Trust (LSE: JII), which is currently trading on an attractive 12% discount, and Jupiter India.

You see, a good investment story is all about excitement and hope. And there is no more excitement in the world right now than in India.

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