Until Jim O’Neill coined the term BRIC in 2001, India was largely irrelevant in the global context. However, during the past twenty years, India’s economy has been quietly compounding at approx. 6.5% p.a. to have become the world’s 5th largest. There is a universal conviction that India will become the 3rd largest nation within this decade, eclipsing Germany and Japan in the next 3 and 6 years, respectively.
More than the absolute growth of India, it is the sheer consistency of it that is remarkable. India has grown despite the vagaries of global economic cycles and shifting geopolitical sands. It owes this noteworthy consistency to the consumption force of a rising youthful middle class.
Equity Market Dynamics
Last month, India’s equity market became the 6th largest globally when its market capitalisation crossed the USD 3 Trillion mark. This spurt has been due to a combination of growing equity culture amongst Indians and a booming start-up environment. Equities are now widely perceived as a credible route for long term wealth creation.
For global investors, the returns from Indian equities have not been disappointing either, as can be seen from the table below. The data is somewhat misleading because the composition of MSCI Emerging Market (EM) has changed over time to include ever-increasing exposure to China.
However given the rising global angst about China, investors are becoming more discerning and allocating selectively to EM countries. India has been a big beneficiary of this shifting focus given that Indian corporate earnings are expected to climb to the mid-teens in the near term. Consequently, India is likely to continue outperforming EM indices through this decade.
Historically, the vast majority of global investors have been perenially hesitant about India. As the chart
below details, there’s always been some global cyclical or event-driven reason not to invest in India. Yet, India’s structural advantages continue to propel markets higher.
Ten years ago, foreign investors controlled nearly 40% of India’s free-float market cap. However, with the frenetic rise of domestic investors (institutional and retail), the foreign investors now influence only about 33% of the free float. Consequently, the ability of foreign flows to cause wild swings in Indian markets is gradually declining.
Studies show Foreign Institutional Investors behave like momentum traders while domestic investors adopt a more systematic buy-and-hold style. Between these two groups, the investment approach of domestic investors has proved to be marginally more profitable than the tactical in & out style of foreign investors. Perhaps it is time for foreign investors to hunker down and commit to the forthcoming India wave.
While China’s crackdown on its big tech is spooking global investors, India is busy minting unicorns. With 50 recognized unicorns, India ranks at third place behind US and China. Of these 50 unicorns, 16 were born just this year and the total number is expected to grow to 150 by 2025. Last month, Zomato, a food delivery app, became India’s first unicorn to list, raising $1.3 billion in its IPO. Online retailer Flipkart recently raised $3.6 billion at a $38 billion valuation, while Paytm, a digital payments company, is slated to list later this year with a $2.2 billion IPO.
These unicorns are primarily funded by global capital chasing the buying power of India’s 625 million internet users. India’s population is expected to overtake China’s this decade, and astute investors don’t want to miss out. With improving incomes and digital infrastructure, India is the final country that offers sustainable growth opportunities at scale.
The revival of global & domestic demand has caused capacity utilisation in India to reach 67% from the low of 47% in Jun-20. New projects and private investment flows have seen a spectacular revival, particularly in the manufacturing sector suggesting a gradual resurgence of the much-awaited Capex cycle. We believe that recovery in consumption and exports over the coming quarters will help lift capacity utilisation rates even higher.
The second covid wave has abated in India, and its economic impact has been slight. The fourth national sero-survey conducted by the Indian Council of Medical research over June-July 2021 has indicated that 68% of Indians have developed antibodies against SARS-Cov2 versus 24% reported in the previous survey done in Dec’20-Jan’21. The high presence of antibodies among two-thirds of the population is likely to mitigate the scale of the third wave if it occurs. India has been vaccinating 3.9m people daily, on average, during this month, and the Indian Government is resolved to prevent stoppage of economic activity.
In summary, Indian companies are undertaking expansion as balance sheets become stronger with improving earnings. This is most visible in sectors like electronics and pharmaceuticals, where supply chains are migrating to India, creating long term employment. The Government supports through conducive policy measures like reduction in corporate tax rates, labour reforms and Production Linked Incentives.
Referenced Study: Market timing skill of foreign portfolio investors in India, March 2020 by K.N.Badhani and Ashish Kumar.
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