Is India the new China? A UK fund and an investment trust that are targeting the sub-continent's growth potential...

By Sam Dunn for the Daily Mail

Published: 14:48 EST, 18 September 2015 | Updated: 09:09 EST, 29 September 2015

When the Chinese stock market recently slumped by 8 per cent in just one day, the cheers in India could be heard across the border.

This apocryphal tale – told by City wags who made money shorting Chinese stocks – does hold an element of truth, though, as the misfortunes of its neighbour have done wonders to highlight India’s own economic prowess.

And they have also served to remind investors seeking spectacular growth that there is a decent alternative to China.

Its economic auguries are promising and have led many to ask: ‘Is India the new China?’ It is on track to expand its economy by 8 per cent this year – the star performer among the world’s biggest economies, according to the IMF.

Inflation is at 3.7 per cent, nearly half the  6 per cent target set by the Reserve Bank of India. This has led many analysts to call for another interest rate cut – from its current 7.25 per cent – later this month, to slash the cost of borrowing and help firms to invest.

And despite its Sensex stock market taking a dive during August’s Great Fall of China, prime minister Narendra Modi has reassured investors that India would be able to cope with global turbulence and China’s slowdown.

In a bid to encourage long-term investment, his government plans to raise the cap on equity investments made by the $100billion state pension fund from 5 per cent to 15 per cent.

Spending on public investment has also rocketed too – up by 40 per cent this year, Government figures suggest. Upgrading India’s roads and railways has fast become a hallmark of Modi’s aim to modernise India.

This has all made India the stand-out candidate for investors among the BRIC economies – Brazil, Russia, India and China.

Tim Cockerill, investment director at stockbroker Rowan Dartington, says: ‘Last year’s election of Modi was a big tick in the box for businesses to grow – he’s pro-reform in favour of enterprise and helping to improve corporate earnings.’

For years the potential for consumer spending growth in India has lured thousands of gung-ho UK investors happy to take a risky punt. Second only in population to China, its mix of a young nation –average age just 26, compared to 36 in China – and burgeoning middle class is too good for savers to ignore.

‘Add in India’s rapid urbanisation and it’s a compelling case for investment,’ says Jason Hollands, of wealth manager Tilney Bestinvest.

The surge in middle-class households is expected to reach 300million by the end of this year – up from just 50million in 2005, as more move to cities for jobs in new high-tech industries.

Many UK fund managers are targeting these aspirational workers. They have bought stakes in companies including Hindustan Unilever and Nestle India.

India’s popularity with UK investors has been growing. Britons have an estimated £38billion in Far East funds, and roughly £12billion is invested directly in India funds.

However, the rupee recently hit a two-year low against the US dollar, and Indian export numbers have been waning over the past six months. But analysts point out India is not as exposed to global setbacks as other Asian countries.

This is because its exports make up a lower share of its total GDP than rivals South Korea and Thailand. Its Sensex stock market is not cheap to buy either, thanks to its near doubling in valuation since Modi’s election last year.

Darius McDermott, managing director of fund broker Chelsea Financial Services, says: ‘Valuations are at a slight premium to the long-term average so the market is not cheap.’ His favoured fund for investors to look at is GSAM India Equity Portfolio. It invests in the building sector, software, financial services and consumer brands.

Over the past three years, it has turned £1,000 into £1,603, according to Trustnet analyst.

By comparison, the average India fund is now worth £1,335.

Hollands likes the JP Morgan Emerging Markets Investment Trust. It has a very bullish view on India which makes up more than a fifth (22.9 per cent) of the portfolio compared to a sector benchmark weighting of just 8.3 per cent.

Companies it backs include IT giant Tata Consultancy Services and IndusInd bank.