The investment case for a dedicated Indian Equity allocation is silently gaining traction with professional investors. We have seen a lot of research on this topic from Indian equity investment and fund managers over the past few weeks. As a result, investor traffic for Indian equity research content is currently trending inside RFPnetworks Terminal.
Here are the top ten reasons why investors are considering investing in the Indian equity market, according to the search queries they are running across the feeds inside RFPnetworks.
India commands a substantial share of over 15% in the MSCI Emerging Market Index, a testament to its prominence on the global economic stage. Over the next decade, the Indian economy will drive a remarkable 20% of global growth. Such prospects are triggering the attention of long-term investors, who can no longer afford to overlook the magnitude of opportunities arising from India's demographic dividend, burgeoning affluence, and distinctive sectoral prowess.
This striking resurgence of the Indian economy follows the ravages of the COVID pandemic. The International Monetary Fund (IMF) forecasts a robust expansion rate of 6.1% for India this year, outpacing numerous economies worldwide. In 2024 the Indian economy is expected to sustain its upward trajectory, with a projected growth rate of 6.8%. These figures underscore India's relevance on the global stage, accounting for a notable 15% global economic expansion in 2023 and over one-fifth of the world's growth in the forthcoming decade.
While India diligently endeavours to unlock its vast economic potential, its equity market also demonstrates considerable progress. India's share in the MSCI Emerging Market (EM) Index has soared from a modest 6.7% in 2009 to its current level. Within the MSCI EM Index, India commands the second-largest weight, second only to China. India is swiftly evolving into an investment destination of colossal proportions. Long-term investors are starting to recognize the sheer magnitude of this burgeoning market.
With the choice between dedicated India or China allocations, investors may do both. The equity markets of China and India represent different opportunities in various sectors and can complement each other within investment portfolios.
An interesting contrast is the MSCI India Index versus the MSCI China Index. The former heavily skews towards Private Sector Banks and Information Technology services, which rely on US corporate tech spending. In contrast, the latter has more E-commerce and gaming platforms alongside state-owned banks and energy companies. For instance, the Consumer Discretionary sector constitutes almost 30% of the MSCI China Index but under 10% of the MSCI India Index. There is more diversity within the MSCI India Index than in other Asian and emerging markets. The divergence in sector exposures results in one of the lowest correlations between the two markets compared to other Asian markets.
There is a further justification for separate dedicated China and India allocations. Investors expect the low correlation between the China and India equity markets to persist due to their differing sector exposures and distinct stages of economic growth. India, as the world's most populous nation, is projected by the United Nations to continue experiencing population growth until 2050. Notably, India could contribute more than one-sixth of the global increase in the working-age population (15- to 64-year-olds) until 2050. This demographic dividend holds significant potential for India, provided there is sufficient job creation for its young workforce. More on this below.
Furthermore, the policy directions of China and India also diverge. Escalating tensions between the United States and China have compelled China to focus on bolstering domestic consumption and achieving self-sufficiency in specific sectors. In contrast, India's Foreign Direct Investment (FDI) is growing as it positions itself as an alternative destination for companies seeking to diversify their supply chains. India achieved its highest-ever total FDI inflows of almost USD 85 billion in the fiscal year 2021-22.
India's stock market has established itself as one of the best-performing markets globally over the past two decades, surpassing China and the broader emerging markets (EM) category. It has even outpaced developed markets (DM) such as the US and global equities. However, India's equity market experienced significant volatility during this period.
While the risk-adjusted returns of India's equity market have been comparable to those of many developed markets, these results have come with higher absolute returns and a corresponding increase in realized volatility, as measured by standard deviation.
Nevertheless, there has been positive news regarding this risk-return tradeoff in recent years. The historically elevated volatility of India's stock market has significantly decreased since the global financial crisis (GFC) of 2008. The reduction in volatility has been more prominent than in many other global equity markets over the same period. This decline in realized volatility resulted from a shift in asset flows towards domestic investors who now impact market movements. Unlike the pre-GFC era, Indian investors have become the primary owners of Indian equity. As a result, the market has become more stable and meaningfully less volatile, as it is now less susceptible to foreign investor sentiment.
The recent volatility in the banking sector in the United States and Europe has raised concerns about tighter lending standards and the potential for the further economic slowdown in these developed economies. However, India appears less vulnerable to slowing global demand, considering that its exports currently contribute to less than 20% of its GDP. Moreover, demand for India's key export, namely Information Technology (IT) services, is expected to exhibit relative resilience.
Interestingly, there has been a noticeable decoupling of tech spending from macro events. Historical data suggests that global IT services spending experienced a decline of 3x GDP growth during the Global Financial Crisis in 2009. In contrast, during the COVID-19 pandemic, the dip was less than 1x in 2020 and further reduced to 0.3x in 2022. This resilience in IT spending indicates that the sector has become increasingly detached from broader economic fluctuations.
Considering the higher wage inflation in developed economies, India is an attractive outsourcing destination. The cost advantages and expertise in the IT sector make it an appealing choice for companies seeking to leverage outsourcing services. As a result, India's position as a player in the global IT services industry remains strong.
The implications of the IT sector's role as a significant job creator in India have far-reaching effects on consumer spending and overall economic growth. The increasing affluence of Indian consumers presents a promising opportunity for investors to capitalize on. It is worth noting that India's per capita expenditure on Fast Moving Consumer Goods (FMCG) stands at under USD 50, which is considerably lower compared to Indonesia, where it is twice as high, and China, where it is three times higher.
Rising incomes often lead to increased consumer spending. As people earn more, they tend to spend more. This trend is especially evident in countries experiencing robust GDP growth, like India, where rising incomes contribute to a thriving consumption landscape. However, the allocation of incremental spending largely depends on the existing income levels. In India, the GDP per capita, measured by purchasing power parity (PPP), stands at approximately $2,000, indicating significant income inequality.
Although overall income levels in India have risen, a substantial disparity remains between the highest earners and the average Indian. The top 10% of income earners in India account for over 50% of the country's total GDP. Much of the population still falls within the low-income bracket by global standards, resulting in the consumption of essential goods which are lower on the consumption pyramid.
Consequently, when individuals earn a few dollars daily, those funds are typically allocated to necessities such as food products. Only a segment of the population reaches the income threshold where earnings get spent on "luxuries" like fast food, sportswear, or other discretionary items. The long-term opportunity in India's consumer sector lies primarily in consumer staples companies.
In the last decade, the Indian government has spearheaded the development of the "India Stack," a collection of free digital resources that empower individuals previously excluded from the formal economy.
The India Stack operates through multiple layers. At its foundation lies an identity layer incorporating biometric identification, and a payment layer enabling greater financial inclusion through bank accounts, direct benefit transfers, and peer-to-peer (P2P) payments. There is also a focus on the emerging Open Network for Digital Commerce (ONDC) digital infrastructure, connecting new services that allow private companies to leverage existing infrastructure for identity verification and payments.
The India Stack's impact is particularly noticeable among street vendors, who have transitioned into the formal economy by accepting digital payments for their goods. These digital transactions serve as proof of income, facilitating access to credit.
Moreover, the expansion of digital infrastructure, coupled with the global surge in remote work during the pandemic, has increased outsourcing to India. India has become the world's preferred remote office as businesses embrace services beyond traditional tech management. Knowledge-based, higher-value-add services such as software engineering and data analytics are now outsourced, generating incremental revenue for companies.
India has abundant sunlight providing potential for harnessing solar energy. The increasing competitiveness of solar power presents an opportunity for India to reduce its dependence on imported oil and natural gas.
Embracing solar energy also brings multiple benefits. It minimizes the need for burning high-emission fuels like coal and wood, which addresses health concerns, mitigating climate change, and alleviating environmental issues.
Moreover, investing in renewable power can facilitate access to low-cost loans for various projects across India. However, large-scale renewable projects may encounter challenges. Realistically, the focus in India will be on residential and light commercial projects, encompassing smaller-scale businesses such as banks, restaurants, small shopping centres and industrial solar projects.
The positive impact of India's renewable power investments extends beyond energy production. It creates opportunities for large Indian enterprises to venture into domestic polysilicon mining, solar panel manufacturing, and energy storage. Additionally, India's pursuit of renewable energy fosters the growth of global leaders in industrial automation, specializing in electrification products like solar inverters and switching.
By embracing solar energy and investing in renewable power, India can drive sustainable development, enhance energy security, and contribute to a cleaner and greener future.
India's infrastructure has lagged, plagued by an unreliable power system, extensive road congestion, inefficient railway and port networks, and a limited number of airports. To cater to its rapidly growing population, the World Bank estimates that India needs to inject a minimum of $55 billion annually into urban infrastructure.
In 2019, Prime Minister Narendra Modi introduced the National Infrastructure Pipeline (NIP), a comprehensive initiative comprising thousands of projects. It aims to attract approximately $1.8 trillion in investment from fiscal 2019 to fiscal 2025.
In the 2023-2024 budget, India demonstrated its commitment to infrastructure development by increasing its capital spending outlay by 33% to Rs 10 trillion (equivalent to USD 122.3 billion). The Union Budget of India for fiscal years 2023 and 2024 has allocated approximately 13% and 22%, respectively, in infrastructure capital expenditure, encompassing energy, roads, water, railways, shipping, and sanitation.
This significant boost will have a positive and enduring impact on the country's long-term economic growth. Notably, research suggests that the multiplier effect for capital expenditure in India stands at 2.45, indicating the potential for amplified economic benefits. Sectors closely linked to the capital expenditure upcycle, such as Financials, Industrials, Cement and Steel, should reap the rewards of this growth trajectory.
Fortunately, India is actively addressing these challenges by committing significant investments to modernize and expand its infrastructure.
These substantial investments, coupled with government initiatives, such as production-linked incentives, stimulate private capital investment, fuel economic growth, and bolster the manufacturing sector.
Companies that produce structural steel tubing, explosives for mineral extraction, and leading cable and wiring manufacturing in India should reap the rewards of urban infrastructure investments.
With India's determined efforts to enhance its infrastructure, the nation is paving the way for sustainable development, improved connectivity, and a conducive environment for businesses and economic prosperity.
Rural infrastructure in India continues to pose significant challenges. However, these challenges also present lucrative opportunities for companies capable of addressing India's infrastructure needs.
Take, for instance, the monsoon season, which demands extensive waterproofing solutions. As paved roads and urbanization expand, effective water management becomes even more crucial. Industries involved in waterproofing adhesives, coatings, piping, and concrete could have growth rates surpassing that of India's GDP.
Agricultural efficiency improvement is another promising growth trend, considering that rural farming remains a prime income source in India. Innovative agricultural chemical manufacturers and distributors stand to benefit from this trend.
Furthermore, India aims to elevate its housing standards to match those of developed markets. The "Housing for All" program, targeting the provision of permanent, affordable housing with basic amenities, was initiated to address this objective by 2022. While the government missed the target, it continues to invest significantly in this area. The 2023 budget allocates nearly $6 billion, a 66% increase, for the "Housing for All" initiative. Funds receive interest rate subsidies, direct construction subsidies and provisions for sanitary products and utilities access.
Notably, over 12 million housing projects have been approved, including 11 million project starts and the completion of 7 million houses since the program's inception.
Companies involved in construction materials with good brands, paint, waterproofing materials, piping, and HVAC manufacturing, are among the potential beneficiaries of India's housing expansion and rural infrastructure endeavours.
India's commitment to improving its rural infrastructure and housing sector demonstrates its dedication to inclusive development, economic growth, and enhanced living standards for its population.
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