India’s economy, one of the world’s largest and rising, appears to be as resilient as ever. While the Covid-19 surge earlier this year created one of the nation’s most trying times in recent history, it appears to have had a limited impact on financial markets. By August, India emerged as the best-performing stock market in Asia, and the International Monetary Fund forecasts real GDP growth of 9.5% in India this year— the highest among Asia’s major economies.1
Source: Respective stock exchanges, as of 12 October 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
Market sentiment remains positive, with record participation by domestic retail investors and a watershed year for initial public offerings (IPOs) and equity capital-raising. In addition, force vectors that were already building before the pandemic have grown even more powerful – including digitalization, direct-to-consumer commerce, decarbonization, and the geopolitical rewiring of supply chains, along with new demand for health and home products and services. We believe these vectors will 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 and a misperception of risks, such as liquidity or concentration risks. However, Indian equities have been shown to provide compelling opportunities for investors.
We see five key reasons why Indian equities should be part of investors’ portfolios.
India is the third-largest equity market in Asia ex Japan in terms of market capitalization, after China and Hong Kong.2 The value of share trading reached US$176 billion in July, making it one of the more liquid markets in the region.3 A series of successful IPOs this year attracted significant domestic investor participation, unlocking domestic savings and diversifying the investor base.
Source: Bloomberg and PineBridge Investments as of September 2021. Represents companies with a current market capitalization of at least $270 million. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
India’s equity market is home to high-quality companies in a variety of industries, including consumer, IT, pharmaceuticals, financials, and materials. India boasts of globally competitive companies in IT services, two-and three-wheeled vehicles, and pharmaceuticals. Its domestic pharmaceutical industry is one of the largest suppliers of vaccines and generic drugs in the world.4 A robust startup ecosystem in India is driving market growth. Just in the first eight months of 2021, at least 24 startups made it onto the list of “unicorns” (startups valued at US$1 billion or more).5 We believe listings of successful and innovative startups will continue to provide unique opportunities to investors.
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. In governance, India is one of the top three countries for regulatory performance in protecting minority shareholder rights, according to a World Bank study.6 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 protection, helping to attract foreign capital into India.
Strong foreign institutional flows to India reflect international demand for Indian equity exposure. India became a standout in emerging markets in 2020, enjoying positive flows despite the pandemic. This continued into the start of 2021, underscoring the confidence of global investors in India’s prospects and their desire to increase exposures despite the underrepresentation of India equities in global indexes relative to the size of its economy. This structural misalignment in the benchmarks is a long-term positive for investors. India’s weight is expected to eventually increase as its economic influence grows.
Source: CDSL, SEBI, Bloomberg, PineBridge Investments, 14 October 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
India is in a strong position from a macroeconomic perspective, with record-high foreign exchange (FX) reserves, a reasonable current account balance, and much-improved corporate balance sheets. Current FX reserves (of around US$641 billion) indicate that the country will be able to fund any outflow without risking runaway currency depreciation.7
Over the long run, the government’s “Make in India” campaign to boost the manufacturing sector stands to benefit from global supply chain diversification and encourage a capex revival. India’s strategy of investing in public digital software should also spur significant innovation in the private sector.
Some investors in India equities tend to replicate the index, assuming that where India’s GDP growth goes, so goes the index. We find that this hasn’t always been the case, partly 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.
We believe a better way to capture growth opportunities in India is by carefully selecting companies using fundamental, bottom-up research that looks beyond index weights. The resulting portfolio represents forward-looking companies that we believe have strong business models, excellent management, and fair valuations and are able to deliver sustainable returns over the long term.
1 IMF as of July 2021
2 World Federation of Exchanges (WFE) as of July 2021. Market cap refers to that of the National Stock Exchange of India.
3 WFE as of July 2021. The value of share trading refers to that of the National Stock Exchange of India.
4 Indian Brand Equity Foundation, June 2020 https://www.ibef.org/industry/pharmaceutical-india.aspx
5 Please see “Here Are The 24 Indian Startups That Entered The Unicorn Club In 2021,” Inc24, 3 September 2021, https://inc42.com/buzz/indian-startups-that-entered-the-unicorn-club-in-2021-in-india/
6 World Bank Doing Business Report, 2020. http://documents1.worldbank.org/curated/en/688761571934946384/pdf/Doing-Business-2020-Comparing-Business-Regulation-in-190-Economies.pdf
7 Reserve Bank of India as of 10 September 2021
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 re-publication or sharing 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.