Superlatives are raining down on India, which seems to have passed China as the promised country for emerging market investors. “It looks like the stars are really all aligned this time.”
The Indian stock market, larger than France and the UK combined and the third largest in the world by 2030, according to Morgan Stanley, has been called an ‹oasis in the global desert›. After a hesitant start in the first four months of this year due to controversies at the Adani Group, one of the country’s largest conglomerates, India’s main index, the Sensex, and the more broadly composed Nifty index, ticked up record highs in July.
The booming Indian stock market reflects the strength and potential of the Indian economy, according to fund managers and economists. According to US hedge fund manager Ray Dalio, like China in the early 1980s, the country is in pole position to achieve the world’s highest growth rates and greatest transformation. Dalio also points out that Prime Minister Narendra Modi has placed himself conveniently between China and the United States on the world stage. He assumes 7 per cent growth for the next decade.
Amundi reckons 5.2 per cent annual GDP growth on average over the next decade, compared with 3.7 per cent for emerging economies and 1 per cent for developed countries. “India is one of the emerging markets where growth dynamics and momentum are the best,” said Alessia Berardi, head of emerging markets macro and strategic research at Amundi. “That’s why the Indian stock market is one of the most interesting right now. The fact that everyone knows that, and that makes it difficult to interpret valuations.”
Veronique Erb, portfolio manager Emerging Markets at RBC Global Asset Management, calls India a ‹very expensive stock market›. “Unilever’s price-earnings ratio is 15x versus 55x for its Indian subsidiary Hindustan Unilever. We have somewhat reduced our overweight position for that reason. However, that is one side of the story. Consumer shares have room for growth as 95% of India’s food sector is still unorganised.”
Production-Linked Incentives scheme
Apart from growth, Berardi and Erb cite pro-India arguments that many other economists and fund managers also use. Under Modi, the business environment has greatly improved, attracting investment in sectors such as semiconductors, smartphones, electric vehicles and renewable energy.
The young labour force and emerging middle class reflect an attractive demographic dividend. Infrastructure (especially railways) is being developed at a rapid pace. And many multinationals are adopting a China plus 1 strategy when outsourcing, opening factories in the country, helped by government subsidies such as the Production-Linked Incentives (PLI) scheme.
According to the IMF, India’s GDP growth is 6.1 per cent this year and 6.3 per cent by 2024. This puts India ahead of ailing China (5.2 per cent this year and 4.5 per cent in 2024). “In a world characterised by weak growth, growth is the main argument in favour of India,” said Berardi. “As long as nominal growth is in double digits, it is good for employment, tax revenues, corporate profits and the country’s credit rating, as India has one of the largest sovereign debts among emerging markets. With an annualised growth potential of six per cent, India can start making a significant contribution to global growth.”
Many people who have said in the past that India is the place to invest have been disappointed by the momentum starting and then suddenly fading out. However, Berardi expects that the Asian country is now on its way to a prolonged period of economic growth and rebounding corporate profits. But, she warns, “Sustaining investment is a key prerequisite for sustained economic growth. India needs to look beyond ICT, pharma and chemicals to keep growing. The PLI schedule has therefore been expanded from 3 to 14 sectors.”
All stars aligned
Erb is also decidedly positive. “Since the rise of Prime Minister Modi in 2014, the country’s politics have been stable for a decade, growth has averaged over 8 per cent and there have been phenomenal reforms at all levels, such as the tax reforms in 2017 or labour market reforms in 2020.”
“It is not the fact that India has just landed on the moon or that they are hosting the G20 this year; it is all the small steps added together that the country is making. India produces over a million engineers a year, you can pay online everywhere and all the multinationals now want a China plus strategy. It seems like all the stars are aligned this time.”