India: selective exposure to a key market

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“Shares are for the bold; I am merely old”.

This quote is attributed to an elderly Indian dweller from the western region of Maharashtra and is characteristic of the country’s post-independence, financially cautious, generation. We are yet to discover whether this quote is in fact real, but that might oddly be beside the point: it does nicely capture the real habit of many hundreds of millions of older Indians. There is a large portion of the Indian population who have forever shunned their domestic equity markets, preferring to invest in physical metals or to keep cash instead.

In more recent years, however, this has started to change, thanks to a combination of modestly rising incomes and easy access to the stock market, often through mobile apps. Indian mobile data costs are among the lowest globally, which helps a lot. In fact, over the past five years or so, around 100 million Indians have become shareholders for the first time.

Roughly one in five households now holds equities, up from just one in 14 five years ago. This is highly significant in the context of a country where GDP per capita is well under $2,500. Mutual fund advertising has gone from sleepy to relentless. India’s Unified Payments Interface (UPI) has created a seamless digital infrastructure that links identity, banking, and investment, often into a few taps on a screen. This is no longer a country of gold and fixed deposits. It’s a country discovering risk and return.

The newer raft of local buyers has, at least in part, helped to push the stock market up very strongly. Foreign investors have also clearly been flocking there over recent years. Whilst this has moderated more recently, it’s still striking that Indian equities are valued at nearly double the level of the Emerging Markets average. Small and mid-sized companies have seen their values run up particularly strongly over the last five years - often ahead of their actual operational progress - outperforming the Nifty 50 (larger caps) significantly. Where we have managed to find companies capable of meeting our return hurdles from their current multiples, these have typically not been at the smaller end of the market.

A lack of overall exposure here has been unhelpful for your Emerging Market portfolio returns. Overall, this has been as much a sin of commission as one of omission, but nevertheless it now poses a clear portfolio construction dilemma. The underweight hasn’t been the result of a bearish call on the country, rather the predicament that investing there presents. India is richly valued, competitively intense, and (at times) overhyped. But in many ways, it is also resilient, innovative, and increasingly attracting global heavy weights. You will likely have seen that Apple has recently announced they will move more of their iPhone production to India: a case in point.

Being honest, the scale of your Indian underweight now feels somewhat uncomfortable, given the possibility of outperformance from a market that may well be perceived as a safe haven amid global turbulence. For instance, a scenario of a weak USD and weaker oil prices tends to play well for India.

Importantly though, we are not minded to chase performance in highly valued assets here. So, what have we been doing? We have been reviewing your exposures closely and revisiting the opportunity set in search of new prospects at palatable valuations, which stack up not just in an India context, but an EM context. Several team members have been to India this year and we’ve recently been digesting a variety of recent work on a range of companies. This has included discussions on banks, several non-bank financials, airlines and logistics companies, amongst others. In many cases, we’ve identified what look to be very strong business models, often with commendable management, but most have had valuations that made us pause. Many investment ideas are in companies where the market appears to be pricing in perfect execution; others have felt a few years too far along their growth runway.

Delhivery, India’s e-logistics disruptor, continues to divide the room. It has very strong management and a compelling total addressable opportunity, but there are also concerns around cost advantage erosion and eventual competition from its own customers. And PB Fintech, the insurance and lending platform, has also received a lot of our attention. This still feels like a business in its infancy, but we’ve been impressed by its promoter and find it increasingly hard to ignore in the context of India’s financial inclusion story.

Where does this all leave us? Are we suddenly bullish across the board on India? Certainly not. Do valuations remain a constraint? Very often so. However, we are finding areas to selectively add to your Indian exposure from here, as we look to narrow an increasingly uncomfortable underweight position.

Risk factors

The Funds are distributed by Baillie Gifford Funds Services LLC. Baillie Gifford Funds Services LLC is registered as a broker-dealer with the SEC, a member of FINRA and is an affiliate of Baillie Gifford Overseas Limited. All information is sourced from Baillie Gifford & Co unless otherwise stated.

As with all mutual funds, the value of an investment in the Fund could decline, so you could lose money. International investing involves special risks, which include changes in currency rates, foreign taxation and differences in auditing standards and securities regulations, political uncertainty and greater volatility. These risks are even greater when investing in emerging markets. Security prices in emerging markets can be significantly more volatile than in the more developed nations of the world, reflecting the greater uncertainties of investing in less established markets and economies. Currency risk includes the risk that the foreign currencies in which a Fund’s investments are traded, in which a Fund receives income, or in which a Fund has taken a position, will decline in value relative to the U.S. dollar. Hedging against a decline in the value of currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. In addition, hedging a foreign currency can have a negative effect on performance if the U.S. dollar declines in value relative to that currency, or if the currency hedging is otherwise ineffective.

For more information about these and other risks of an investment in the Funds, see "Principal Investment Risks" and "Additional Investment Strategies" in the prospectus. There can be no assurance that the Funds will achieve their investment objectives.

This communication was produced and approved in May 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

As at May, 2025, Baillie Gifford held Delhivery and PB Fintech. A full list of holdings is available on request and is subject to change.

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