Indian Stock Market becomes the China + 1
Many Investment Managers expect India to post the largest real GDP growth globally in 2023. But the Indian market is expensive despite strong fundamentals.
Many Investment Managers today forecast that India will have the largest Real GDP growth globally in both 2022 and 2023 (~7% and ~6% seems to be the consensus, respectively). However, there are concerns that despite strong company fundamentals, valuations are high and it may be time to go neutral or underweight the Indian stock market.
Such a tactical decision does not diminish the long term structural attractiveness of Indian Equities. The economy remains one fifth the size of China and is starting to be recognised as the China + 1 play. The demographics are a story in themselves with so much potential, given the economy's stage of development.
India represents a market with enormous opportunities. And the global institutional world is starting to wake up to these possibilities. We think this may explain why professional investor traffic flowing inside RFPnetworks to India Equity research is spiking.
In what is turning out to be a challenging year for global stock market returns, the performance of India stands out within the emerging market asset class and global stock markets. In the nine months through the end of September, MSCI India has fallen by 9.7%, compared to the Emerging Markets index that is down 27.2%. Within Asia, only Indonesia and Thailand have performed better than India this year. This builds on a base of very strong long term returns, with India having outpaced the EM index over most time frames. The result has been that the weighting of India within the MSCI Emerging Markets index has increased further, reaching an all-time high of 15.3% by the end of the third quarter. As a result, India’s weighting has eclipsed both Taiwan and Korea, becoming second only in size now to China.
Investor Views Are Changing
China Equity investors have faced a lot of bad news this year. In contrast, the case for Indian Equities has only got stronger. There are three reasons.
The past 12 months have brought a continuous chain of bad news for investors in Chinese equities. The question on professional investors minds today is whether moving money from China and into India makes sense.
In many respects, the long term investment theses for India shares many top level commonalities with China, albeit with differences in the details:
There is the demographic story - India has a younger population that will drive urbanisation as they head for cities, educated and fully focused on wealth creation.
The corporate story - India boasts corporations and a new IPO pipeline focused on delivering on the new digitisation and e-commerce megatrends supported by software development services.
The geopolitical story - as long as tensions between the U.S. and China remain, diversifying supply chains away from China and into India makes good business sense.
The answer may lie in current valuations. Much of the good news in India may already be priced in. But with a diverse array of opportunities across multiple sectors to choose from, company fundamentals, governance and leadership may be able to unlock the significant opportunity presenting itself to India.
Resilience From Experience
Emerging Markets have performed relatively strongly versus Developed markets during the crisis. This surprised most risk-off investors for several reasons.
Whilst Emerging markets have underperformed the S&P 500 year to date, the difference has only been marginal. Which is not what many investors expected.
In times of crises, risk-off sentiment usually drives investors away from Emerging Markets and towards 'safe-haven' developed markets, government bonds and gold.
On this occasion, many emerging markets have proved resilient against a challenging backdrop, especially given the headwinds coming from the US: A strengthening US dollar, US Yield Curve inversion, soaring 30-year mortgage rates impacting the housing market, and tighter fiscal policy squeezing consumers. And the tensions between the U.S and China, which has not been helped by Xi Jingping's stance on the Russia-Ukraine situation.
So what is driving Emerging Markets resilience, and specifically, which countries are potential beneficiaries of the current market dynamics?
Country Selection Now Key
Emerging Market Equities are experiencing significant performance dispersion across countries. Their exposure to inflation is not uniform.
The simultaneous & joint impact of COVID, the Russia-Ukraine situation, and simmering geopolitical tensions between China and Taiwan has investors worried. Especially investors in Emerging Markets.
But a closer look behind the EM Equity benchmark tells a different story. And for specific countries, the story is one of opportunity. Especially in Asia where inflation is not necessarily as prevalent as in developed markets.
Read the latest views from Emerging Market equity managers inside RFPnetworks.
Is the sell-off in Indian Equities just about crude oil and commodity prices. Or has the long-term investment thesis for Indian Equities changed.
India was one of the best-performing emerging markets in 2021. Yet YTD 2022 the picture has reversed with net foreign capital outflows and significant selling. But is this all about crude & commodities or is the long term structural investment thesis still valid?
View all India Equity portfolio manager views inside RFPnetworks.
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