Markets
Why India is better placed than most emerging markets
Summary
- A Mint review of data shows India outperforming key emerging market peers from March 2020 when lockdowns hit markets and economies.
A significant gap has opened up between Indian stocks and other emerging markets which have swooned in the recent past on fears about a US recession, prompting some investors to conclude that India has decoupled itself from its peers.
While MSCI Emerging Markets Index fell about 21.8% in the 12 months to 31 August, MSCI India Index declined just 3.17%. Similarly, while the EM index shed 6.49% in the three months to end-August, MSCI India gained 6.14%.
Some experts suggested that India’s strong economic growth despite economic troubles in the US and European nations shows India’s recovery from the pandemic has diverged from most emerging and developed countries, underscoring India’s increasing economic independence.
“India is in a sweet spot compared with its EM peers like China, Russia and Taiwan—one is weighed down by growth concerns, the other by crippling sanctions and the last on the brink of a face-off with its powerful neighbour," said Nilesh Shah, managing director and chief executive of Kotak Mahindra Asset Management Co. “Amid these hotspots of distress, India stands out as an ideal investment destination, offering high economic and corporate earnings growth prospects, robust corporate governance standards and a focus on green initiatives. These will ensure our market continues to trade at a historic high premium to EMs and attract more investment flows, going forward."
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The one-year forward price-to-earnings multiple of MSCI India as of August end was 21.65. That compares with 11.09 for the MSCI EM.
With India likely to remain the fastest-growing economy over the next five years, stocks will continue to command a premium over other emerging markets, said Manish Jain, fund manager, Coffee Can PMS, Ambit Asset Management. India is likely to continue to grow at a 6-6.5% pace for the next few years, translating into earnings growth of 10-12%, Jain said.
“The domestic consumption demand is strong, the agri sector continues to grow at a steady pace, credit growth has been picking up with no impact on asset quality, and most importantly, inflation has peaked," Jain said, adding that these factors should make India one of the favourite investment destinations for foreign investors.
Given India’s outperformance, it replaced Taiwan as the second-biggest country by weight on the MSCI Emerging Market (EM) Index this month, raising the potential of higher allocations from passive funds as domestic stocks continue to outperform their EM peers. The country’s weight on the MSCI EM stood at 14.11% against Taiwan’s 13.67% as of 5 September. China continues to enjoy the highest weighting of 29.08%.
Market data reviewed by Mint shows India outperforming key EM peers from March 2020, when global financial markets and economies began to be roiled by pandemic-induced lockdowns. For instance, India has seen its weight rise 683 basis points from 7.66% at the end of March 2020 through August 2022. Over the same period, China’s weight has fallen 398 bps from 36.07% through August 2022, Taiwan’s has increased by 251 bps, and South Korea has fallen 9 bps. One bps is equal to 0.01%.
“India is currently an oasis in terms of growth prospects and comfortable external position compared with its EM peers, and thus, the historic high premium relative to the EM pack could persist," said Mahesh Patil, chief investment officer of Aditya Birla Sun Life Asset Management Co.
To be sure, not everyone agrees that India’s path will diverge significantly for very long. India’s dependency on energy and commodities imports makes it vulnerable to global supply shocks.
For now, the divergence can be attributed to India being a domestic consumption-driven economy, unlike China and Taiwan, which rely heavily on exports to Western markets.
While Moody’s cut its India GDP growth estimate last month by 1 percentage point to 7.7% for 2022, it is still better than the agency’s growth forecasts for emerging markets such as Indonesia (5.1%) and China (3.5%).
“With inflation lower than in the developed world, India is turning out to be an oasis in an uncertain world. This is reflected in the sharp outperformance of the Indian markets," said Jyotivardhan Jaipuria, founder and chief executive of Valentis Advisors.
In fact, a domestic fund manager said on the condition of anonymity that there is some thinking among global money managers to consider an EM index ex-China, where the focus would be more India-centric, given the structural advantages India enjoys relative to other EM peers.
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