India equities glimmer against a resilient, rising economy

India’s economy appears to be as resilient as ever, weathering the onslaught of Covid-19 in the past two years along with new geopolitical headwinds. The International Monetary Fund (IMF) forecasts real gross domestic product (GDP) growth of 7.4% this year — defying global recession fears, and India’s equity market has outpaced other major Asian markets over the past year.

India has outperformed major equity markets in Asia in recent quarters

Despite fears of skyrocketing inflation due to a surge in imported oil prices after the war in Ukraine, inflation appears to be starting to come down. 

Domestic consumption remains robust, and growth in India’s merchandise exports is set to continue as India positions itself as a stable alternative for global supply chains caught up in Covid-related restrictions elsewhere in Asia. Exports have stayed above US$30 billion over the past 15 months, which should also help offset increased import costs.

Inflation has started to moderate (CPI change, year on year)

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We believe that over the long term, force vectors that were already building before the pandemic — including digitalisation, decarbonisation, growth in direct-to-consumer commerce, and the geopolitical rewiring of supply chains — will gain greater traction, along with new demand for health and home products and services. 

We expect these vectors to expand opportunities for differentiated returns within sectors, which will be advantageous for stock selectors.

Why India equities look attractive

Historically, investors have been underweight Indian equities because of India’s underrepresentation in global indices, along with a misperception of risks, such as liquidity or market concentration. 

Yet, even over the challenging past two years, Indian equities have offered compelling opportunities for investors.

We see five key reasons why India equities should be part of investors’ portfolios.

A large and liquid opportunity set

India is the third-largest equity market in Asia ex Japan in terms of market capitalisation, after China and Hong Kong. 

The value of share trading on the National Stock Exchange of India reached US$123 billion in June 2022, making it one of the more liquid markets in the region. 

Since the pandemic began, the market has seen significant growth in domestic investor participation, particularly from retail investors channelling domestic savings into the stock market and providing a buffer against foreign capital outflows.

Monthly retail flows into systematic investment plans* in India

Corporate profits are looking up

India's economic overhaul is progressing well after Covid-related disruptions. The S&P BSE Sensex index is expected to double over the next three years, led primarily by compound annual corporate profit growth of 25%. This implies a relative outperformance of about 16% versus the broad emerging market index, which is modelled to gain 9% annually.

Corporate profits to GDP are now trending up after persistently declining for more than a decade. This is partly driven by reduced stress in sectors such as banking and metals. At the same time, the IT and pharmaceutical sectors continue to raise India’s stature in the global arena.

India’s equity market is home to a diverse set of companies, from century-old conglomerates to global consumer brands and new digital players poised to challenge the status quo. A fast-growing digital economy is enabled by the rapid acceleration of instant electronic payments via the government-initiated unified payments interface (UPI).

Rising ESG awareness may usher in positive change

On the environmental front, renewable energy generation in India has been increasing in recent years, and many companies are adopting energy-efficient processes to improve their competitiveness and sustainability.

While coal dominates electricity generation in India, the country aims to reach 450GW of renewable capacity by 2030. By 2040, solar power is expected to match coal’s share of power generation.

On the governance front, regulators introduced wide-ranging reforms in 2019, covering disclosure requirements, rights of shareholders, and board responsibilities. The reforms further aligned Indian companies with global peers while enhancing transparency and minority shareholder protections.

Growing global interest in India equities

While we have seen a rotation out of emerging markets, including India, since the onset of US rate hikes, global benchmark exposures to India equities remain low relative to the size of its economy. 

India comprises 13.96% of the MSCI Emerging Markets Index (as of 29 July 2022), while Taiwan represents 14.83% and China 32.04%.

This structural misalignment in the benchmarks is a long-term positive for investors, with India’s weight expected to eventually increase as its economic influence grows.

Stable economic prospects

Unlike in previous challenging periods, India’s macroeconomic standing today is strong, with record-high foreign exchange (FX) reserves, a reasonable current-account balance, and much-improved corporate balance sheets. 

Current FX reserves indicate that the country will be able to fund any outflow without risking runaway currency depreciation.

India enjoys solid foreign exchange reserve adequacy

Over the long run, the government’s “Make in India” campaign to boost the manufacturing sector stands to benefit from diversification of the global supply chain and potentially encourage a capex revival for standout sectors, such as chemicals, industrial machinery, pharma, and autos. 

An approximately half-billion strong labour force, including a large pool of highly educated young people, supports this manufacturing push.

Read more: India: A micro and macro anchor amid global uncertainty

Access compelling opportunities with active stock selection

The changes underway in India’s economy may not be fully reflected in the benchmark indices, in part because of the structure of the Indian economy, which includes a large informal sector and many unlisted enterprises. In other words, the index can be a poor proxy for overall economic activity.

With such a dynamic economy, we believe a better way to capture opportunities is by carefully selecting companies using fundamental, bottom-up research that looks beyond index weights. 

India is a long-term story, and while growth opportunities abound, we remain vigilant against the potential risks typical in emerging markets. 

We seek companies with strong business models, excellent management, and fair valuations and that are able to deliver sustainable returns for investors over different market cycles.

This article was originally published by PineBridge Investments on 31 August 2022.

PineBridge Investments is a global asset manager focused on active, high-conviction investing. As of 30 June 2022, the firm managed US$141.1 billion across global asset classes for sophisticated investors around the world. 

Endowus has three funds from PineBridge (as of 3 Oct 2022), namely the India Equity Fund, the Asia ex Japan Small Cap Equity Fund, and the US Large Cap Research Enhanced Fund.

Get started building your own portfolio with these funds on the Endowus Fund Smart platform.

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