Cooling investor sentiment toward India may be a contrarian positive signal

The concerns around India remain the same. Valuations are too high. There is no economic & earnings momentum. We have no artificial intelligence (AI) play or beneficiary

I had the opportunity to spend some time with global investors over the past week. These are some of the smartest long-term allocators of capital, with good track records who also provide thought leadership for the industry. Having done this for many years now, I do have a sense of how preferences and themes can change over time.

 

What were the key takeaways for me? I have never seen such indifference to India as I saw on this trip. It was almost like what we used to see 20 years back. Everybody met, but more out of politeness and our long-term relationship. There was not one meeting where the allocators walked in with any intention to add to their Indian public markets exposure. They were happy to get an update, understand the argument as to why India is bottoming out in terms of relative underperformance, but there was no bias for action at all. Quite sobering.

 

The concerns around India remain the same. Valuations are too high. There is no economic and earnings momentum. We have no artificial intelligence (AI) play or beneficiary, and concerns around the lurch to populism. For the first time in many years, I got questions around the sustainability of the 7 per cent real gross domestic product (GDP) growth number that most used to take for granted. For the first time, I got asked why India cannot remain stuck as a lower middle-income country. 

 

With the onset of AI and its impact on jobs, India’s demographics seem less of an advantage. Many asked why India has no play on AI? It was pointed out to me that China spends 25 times what we do on research & development (R&D). Their R&D spend/GDP is 3.5 per cent, compared to 0. 7 per cent for India and their economy is five times bigger. In terms of sunrise industry, there is not one in which India is a major participant, or in control of the technology. In existing industries like auto and pharmaceutical, as they pivot towards electric vehicles (EV) and biotech, we are being left behind. Has India’s obsession with return on equity and margins gone too far, at the expense of innovation? Is the market capitalisation obsession hurting long-term innovation? Is the market too short-term in its thinking?

 

The world cannot absorb another China was a key message. China is not backing away from global manufacturing dominance, fighting to keep its share if not grow it further. There is no place for a country of India’s size to emulate what China has done on manufacturing and exports over the last 30 years. The rest of the world will not accept it as there is too much political resistance to globalisation today.

 

On IT services, will AI kill this golden goose? If we need fundamentally fewer people to do white-collar jobs, what is the scope to offshore these roles? The jobs that remain will likely need to be kept within the country to avoid social chaos.

 

It all comes back to predictability and stability of growth. When everyone was convinced that India had decades of strong growth ahead of it, they could stomach the valuations and pay up for that growth. If the growth itself or its duration comes under doubt, then current valuation premiums become unsustainable.

 

There was also genuine irritation about the capital gains tax on foreign investors. They do not pay such a tax in any other overseas market and it has really dampened returns over the past few years. India’s expected return profile, and hence its relative attractiveness, has declined.

 

On tariffs and geopolitics, most were not too worried. Everyone felt that ultimately, for the US, China remains its only true strategic rival.  India continues to be important in containing China, and this will ensure that relations between India and the US do not go off the boil for long. This episode did, however, show the lack of economic leverage for India. It may be the fourth-largest economy in the world, but is it critical in any supply chain?

 

Most allocators continue suffering on the liquidity front. While things are better than 12 months ago, the US initial public offering (IPO) markets are still far from fully open. The pipeline of potential listings remains immense and there is no way all the unicorns can be monetised. Expected liquidity of any new investment made is being closely tracked and getting paid for taking illiquidity was a common theme. India remains a sore spot from a DPI ( distribution to paid-in-capital) perspective. Both private equity and venture capital in India have been deeply disappointing on this front, despite having one of the most robust IPO markets to sell into. There was also a lot of debate around the size of the new funds being raised.

 

AI remains top of mind for everyone. Some are lucky enough to have too much exposure to the theme and are worried about bubbles. When to cut? Others don’t have enough exposure and are wondering whether to add now. How will AI change the world? How to invest through a bubble? Does the 1999/2000 dot-com bubble provide a good playbook?

 

There was renewed interest in emerging markets (EMs) after a long time. Many investors were keen to reduce their dollar exposure. The EM equity asset class has finally outperformed this year after 15 years of underperforming. Could this be the start of a trend. Most are underweight EM and if money moves from the US into EM, the asset class will be overwhelmed with flows. Gold is a good parallel.

 

I took the lack of interest in India to be a contrarian positive signal, along with record low absolute foreign ownership, a structural India underweight by all funds, and now five years of zero flows from foreigners. India has also underperformed the EM asset class and Asia by 30 per cent over the past 12 months, a 30-year record. I expect earnings to accelerate in FY27, led by financials and nominal GDP accelerating by about 400 basis points. Global inflows will resume at some stage, either when EM comes back or the AI trade fades. Valuations, while not cheap, are about 15 per cent cheaper than last year. Despite the scepticism I picked up on the trip, the setup for India going into the next financial year looks positive to me, provided domestic flows remain stable and we don’t blow up the IPO markets!

The author is with Amansa Capital