Economies in India and Indonesia poised for growth

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Investors who limit their search for returns to export-driven economies may want to take a second look at India and Indonesia, two countries where investment in consumer-driven growth has significant potential to generate returns, says Mark Lin, founder, chief executive officer and lead portfolio manager of Alpha-Lab Asset Management Inc. Lin specializes in diverse global, international, emerging market and Asia-Pacific equity strategies.

CFO: What advantages do India and Indonesia share to attract your interest as an investment manager?

ML: The demographic advantage of very young populations is a huge indicator of future productivity. The average age of a person in India is 28.7 for a population of 1.4 billion. For Indonesia, it’s 31.1 for a population of 275 million, something we’re no longer seeing in the most advanced economies.

CFO: Other countries are seeing similar demographic trends. What’s the difference in investment potential?

ML: China once boasted the same demographic advantage, but the average age there is already up to 37, so they’re already past that surge of young citizens. India is a democracy and although they have a lot of red tape, the government doesn’t take the draconian approach to governing the corporate world that we see in China, which limits its growth potential.

We see similar demographic advantages in countries such as Brazil and Mexico, but they have periodic economic setbacks that prevent the middle class from fully flourishing. The trend line is much more stable in Indonesia and India, where we see GDP per capita approaching and surpassing US$4,000.

CFO: Why is a GDP per capita threshold of US$4,000 significant?

ML: Once you pass that US$4,000 threshold you typically go from a population that’s underbanked to a population that has bank accounts and begins to purchase more than just the necessities. It creates a large middle class as we saw with China. With the emerging middle class, we see the availability of credit, mortgages, purchases of scooters and other vehicles. People start to travel and we see the purchase of life insurance products. Indonesia’s GDP per capita has surpassed US$4,000 and although India’s GDP per capita remains under US$3,000, it’s following a very similar trajectory.

CFO: So the rising middle class in both countries is creating profitable companies that benefit primarily from increased domestic consumption?

ML: Yes. Take a look at Canada, where the World Bank reports that exports of goods and services represented almost 34 per cent of the economy in 2022. Compare that to Indonesia, where exports represented just over 24 per cent, and India, where exports represented just over 22 per cent. The expanding domestic economy is the primary driver of growth.

CFO: With domestic consumption driving the economies of these two countries, where can investors find growth opportunities?

ML: One area is well-managed banks that focus on consumer banking and corporate lending in a growing economy. Several banks in each country have demonstrated a clear upward trend over the past 10 to 20 years.

CFO: But banks aren’t invincible, as we’ve seen recently with some US regional banks.

ML: That’s why we stress “well-managed” banks focused on their core business and not getting fancy. We see Scotiabank, for example, underperforming in the Latin American market and TD almost getting dragged into the US regional bank crisis. At the same time the National Bank of Canada performs well by focusing on everyday banking…  simply doing the banker’s job.

CFO: What other sectors are benefiting from domestic growth in these economies.

ML: The telecom sector is also benefiting from a growing and more affluent middle class.

CFO: Why aren’t these emerging economy stocks attracting greater attention in North America.

ML: I think they’re underappreciated simply because investors in North America are focused on the NASDAQ-100 — even Europe doesn’t get much scrutiny. It’s no surprise that emerging markets don’t get a lot of attention. These equities are neglected by many investors in my view, and deserve more consideration.

For more information on Alpha-Lab Asset Management, visit: https://alphalabinv.com.

PBY Capital Limited (“PBY”) is registered as an exempt market dealer and an investment fund manager with Canadian provincial securities regulatory authorities, servicing family offices and their professionals. For more information, visit: www.pbycapital.com.

Alpha-Lab Asset Management Inc. is the portfolio manager of certain funds managed by PBY.

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