India’s economy appears to be as resilient as ever, weathering the onslaught of Covid in the past two years along with new geopolitical headwinds. The International Monetary Fund (IMF) forecasts real 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.1
Source: MSCI standard indexes for each market, in USD net, as of 30 June 2022.
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.2 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.3
Source: Bloomberg, Reserve Bank of India, and PineBridge Investments, August 2022. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
We believe that over the long term, force vectors that were already building before the pandemic – including digitalization, decarbonization, 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.
Historically, investors have been underweight Indian equities because of India’s underrepresentation in global indexes, 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 capitalization, after China and Hong Kong.4 The value of share trading reached US$123 billion in June 2022, making it one of the more liquid markets in the region.5 Since the pandemic began, the market has seen significant growth in domestic investor participation, particularly from retail investors channeling domestic savings into the stock market and providing a buffer against foreign capital outflows.
*A Systematic Investment Plan (SIP) is a method of investing a fixed amount at a fixed interval in a mutual fund scheme instead of making a lump-sum investment. Source: Association of Mutual Funds in India and PineBridge Investments, August 2022.
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 modeled to gain 9% annually.6
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 pharma 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 environmental, social, and governance (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.7
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 Market Index, while Taiwan represents 14.83% and China 32.04%.8 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.
Source: Federal Reserve Bank of Dallas, published July 2022. Note: Reserve adequacy equals central bank foreign exchanges reserves minus short-term foreign currency debt. Plus current account, all as percentage of GDP. Data as of fourth quarter of 2021, except for Russia which is second quarter 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
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 labor force, including a large pool of highly educated young people, supports this manufacturing push.
The changes underway in India’s economy may not be fully reflected in the benchmark indexes, 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.
1 Growth figure from the IMF as of July 2022; equity market data from MSCI as of 30 June 2022.
2 RBI as of July 2022.
3 Ministry of Commerce and Industry as of July 2022.
4 World Federation of Exchanges (WFE) as of June 2022. Market cap refers to that of the National Stock Exchange of India.
5 WFE as of June 2022. The value of share trading refers to that of the National Stock Exchange of India.
6 Bloomberg as of August 2022.
7 International Energy Agency, India Energy Outlook 2021, https://www.iea.org/reports/india-energy-outlook-2021
8 MSCI as of 29 July 2022.
Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.