Despite an unexpcted election result, the outlook for India remains as strong as ever, says Darius McDermott, managing director of FundCalibre.
Rewind back three months and India was expected to be one of the more straightforward outcomes in a very busy year for elections.
The consensus was that Narendra Modi would win a comfortable majority and move into his third tenure – allowing him to continue with many policies which have helped to transform the fortunes of India in the past decade.
The reality was very different. While Modi may have won, his party’s failure to win an absolute majority for the first time in 10 years sent markets falling. There was talk of an end to the decade-long bull market amid fears policymaking would slow down.
But much like the global correction we saw in early August, India was quick to brush off the uncertainty and move forward again. Year-to-date, Indian equities are well ahead of their global counterparts (17.6% vs. 12.1%)*. We must not forget the long-term structural factors at play here – strong demographics, growth, few geopolitical concerns, strong corporate governance, and the growing online economy all come to mind.
It is important to remember that growth in India has not been purely down to Modi. Investment returns in the subcontinent have been primarily driven by India since the economy was liberalised in 1991. This set it on the path to growth. Economic growth averaged roughly 4% in the three decades prior to 1991, and approximately 6% in the three decades following**. The results are reflected in equity markets – with the MSCI India index returning an annualised return of almost 9% between 1992 and 2022**.
The outlook remains as strong as ever. The International Monetary Fund expects India to grow by 7% in 2024 (up from its 6.8% prediction in April), slowing slightly to 6.5% the following year***. It has actually recorded GDP of 8.15% over its fiscal year 2023-24, the third year India’s economy has exceeded growth expectations (averaging 8.3% annual growth over this period)****.
Those secular changes support future growth. Ashoka India Equity Investment Trust portfolio product specialist and macroeconomist Dipojjal Saha cites the infrastructure story as a key element, citing the compound annual growth rate on capital expenditure standing at circa 20% since Modi came to power^.
He says: “90% of India’s railways are now electrified, compared with 30-40% previously. The number of airports has doubled, while the turnaround time at ports has improved rapidly. Previously, some 20 million rural homes had access to tap water, now almost all of them have access.”
The second area is manufacturing, with India growing in both the defence and technology space. The “Made In India” initiative has also lowered reliance on imports.
The drawback on the short to medium-term remains valuations. India typically trades at a premium of around 40% above MSCI Emerging Markets, but this has been notably higher in 2024. Alquity Indian Subcontinent manager Mike Sell says India’s P/E has re-rated over the past decade due to Modi’s reforms^^.
He says: “India has a high P/E because of strong earnings growth over a number of years. The earning per share stands at 17%, giving it a price/earnings-to-growth (PEG) ratio of 1.3x. On a PEG basis, India is cheaper than the likes of Korea, Japan, Mexico and the UK. Countries like Korea, Taiwan and Thailand may have a lower PEG, but they are cyclical, not structural stories. India has multi-years of growth, not pockets of opportunity.”
Is quality growth set to lead?
UTI India Dynamic Equity manager Ajay Tyagi believes we are starting to see signs of a market rotation in India, citing an end of the value rally and a rebound in quality stocks. In a market update from June, Tyagi points to a few factors which may see this quality growth rally continue. This includes the strength of private banks post elections, when compared to the lag in public sector banks.
He says: “Despite healthy balance sheets and expected ROEs of 16-18% in the coming years, private banks trade at a 20-30% discount to their 5-year average P/B ratios. The valuations gap between public and private banks is at its lowest due to a significant re-rating of public banks in the past couple of years.”
Tyagi also says high-growth consumer stocks are recovering, due to reviving rural demand and optimistic projections for the upcoming monsoon season. The chemicals sector is also poised to bounce back.
Election results are clearly important, but India has been on a positive trajectory now for well over three decades. All indications are that there remains a consensus on economic reform, democracy, business efficiency and growth across the board – add in the long-term tailwinds and it is hard to dissuade an active investor who is looking at the region as a long-term investment.
Beyond those already mentioned, another country specialist fund investors may want to consider is Goldman Sachs India Equity Portfolio, which is an “all weather” vehicle managed by Hiren Dasani. Those wanting broader exposure through an emerging markets vehicle might look to the FP Carmignac Emerging Markets and the FSSA Global Emerging Markets Focus funds, which have allocations of 19% and 26% respectively to Indian equities^^^.
*Source: FE Analytics, total returns in pounds sterling for MSCI India and MSCI World, 29 December 2023 to 26 August 2024
**Source: Stewart Investors, January 2023
***Source: International Monetary Fund, July 2024
****Source: Deloitte, August 2024
^Source: Ashoka India Equity Investment Trust webinar
^^Source: Alquity – The Many Faces of India
^^^Source: fund factsheets, 31 July 2024
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
