An updated perspective on India

While markets could remain choppy and correct more, thought leaders in the investment world have turned positive

Over the past month, I have had the privilege of meeting numerous investors who have spent a significant amount of time and effort trying to formulate a long-term view of India. Many of them have spent several weeks in the country, engaging with numerous stakeholders, investors, policymakers and corporate leaders.

The investors are all focused on the long term, real money, and are highly sophisticated. This is the same group who was very early into China, made large returns there, and have a sense of how markets and countries grow and mature. They are looking for pattern recognition between what happened in China and what may happen in India.

Every investor I met came away from their time spent in India, enthused, excited and convinced that they should increase their long-term allocations. The bullishness was based on a conviction that the country could grow for the coming years at greater than 6 per cent (real gross domestic product). Macro stability appeared visible and the old concerns about balance of payments or fiscal issues were no longer a focal point. Corporate and banking balance sheets had never looked better. There was both the willingness to lend/borrow and the ability to do so. Household debt/GDP was still much below the emerging market (EM) averages. India is not in a retail debt bubble. Corporate confidence was much higher than in most other parts of the world and capex intentions were real. There was appreciation for the progress India had made in digitising daily activities and the role of digital public goods. The role of this digital infrastructure in enabling direct benefit transfers and reducing leakages was better appreciated.

After spending time in the country, meeting suppliers and seeing data that Apple had already exported $5 billion worth of iPhones in 2022, there was a strong belief that the target of 25 per cent of iPhones being made in India by 2025 was real. There was much appreciation for the work done by the government to make this happen, and the significance of this supply chain shift was acknowledged. If Apple can source/export $25-30 billion of iPhones from India, given their obsession with quality, then there is no excuse for any MNC to stay away from the country.

It was acknowledged that many of the structural reforms had already taken place and much of the pain was upfront and had been absorbed. Now was the time to accelerate growth and get the benefits. As India moves from $2,500 GDP/capita to $5,000 GDP/capita over the coming 6-7 years, many investors have seen this journey take place in China. China was at $2,500 in 2007. This increase in per capita wealth has tremendous consequences for both quantum and type of consumption. It can be transformational for many discretionary categories. Companies positioned for this trend can be structural beneficiaries.

As always, there was renewed appreciation for the quality of companies, both in the public and private domain. Governance and disclosure norms, in their view, had improved, and minority investors now had much greater powers than a few years ago. The start-up ecosystem was real and over the coming five years, according to them, at least 25 quality companies would list from the venture capital (VC) ecosystem. Start-ups could easily absorb $25-30 billion of capital annually.

There is acceptance that domestic capital flows are structural. There may be cyclicality but the trend and direction is clear. As India grows, both absolute savings and the percentage coming into financial assets and equities will rise. This is a structural stabiliser to the markets and may be one reason why multiples do not correct beyond a point.

An obvious question is: Why all this interest now? These trends have been visible for some time. Foreign investors have actually been net sellers of over $30 billion in the last 18 months. This selling does not seem to indicate any change in the perception towards India.

What is happening is that most of these very large and sophisticated investors are now putting in caps on their China exposure. At best, they will put no new money into China, many will actually bring their exposure down in absolute terms. This is a board-level decision. For context, most of these investors today have between 5 and 8 times their India exposure in China.

Investors want to keep exposure within the EM asset class, as many feel that EM assets will now outperform after 15 years of mediocre performance. Within EM, six countries ( China, Taiwan, South Korea, India, Brazil and Saudi Arabia) account for more than 75 per cent of the index. China is capped, most think Korea will move to developed market status soon, Taiwan faces geo-political issues, Saudi Arabia is seen as a play on oil, and Brazil remains a “show me story”. In this list, India stands out as a market with good long-term prospects and where you can deploy capital in size.

This realisation of limited choices within the EM universe is what is driving these investors to spend time in India. Many of these investors made a structural bet on China and were proven right, with their managers outperforming the markets handsomely. They now feel that something similar can be done for India. The old questions of whether we need dedicated exposure for India are not being asked today. The answer is clear. If all this is happening then why are foreigners still selling?  The bullishness outlined above does not seem to be reflecting in dollars on the ground.

The number one answer is valuations. There remains discomfort with the multiples India is trading at. While everyone acknowledges that the markets have done nothing since October 2021, and multiples have corrected, at 18-20 times current earnings, valuations are still seen to be too high and at too much a premium to EM averages. Quality, especially, is expensive in India. Most would prefer to wait for a better entry point. They feel they have time, as we have an election in early 2024, domestic consumption is slowing and there is global uncertainty. You do not need to pay up for growth at the moment.

The second issue is a short-term lack of funds/liquidity. Many of these investors have a temporary mismatch and are over exposed to private assets. Distributions are down and many newer funds are calling money aggressively. This is a short-term problem, which will correct over time.

I don’t think I have seen such long-term bullishness on India from a group this sophisticated. It augurs well for longer-term capital flows into the country. Every correction will see money being put to work. Alternatively, we could see our markets continue to tread water for some more time as earnings continue to catch up to current prices and valuations normalise.

While no one can predict short-term market direction, the long-term case for India looks bright. Markets could easily remain choppy and correct more but if you take a five-year view, the outlook seems more promising then it has for some time. Imagine if we have $30 billion of positive foreign portfolio investment flows added to the domestic capital, how will markets trade then? If the thought leaders in the investment world have turned positive, it is only a matter of time before the followers start to convert.

The writer is with Amansa Capital