December 2024
Market Commentary
India: a new theme for our client portfolios
(2 min read)
3rd December 2024
The regime change for global interest rates over the last few years - from zero to 5% in the US - has been a major headwind for emerging stock markets.
The strength of the USD has meant that there has been little appetite for Emerging Markets (EM). This, coupled with a tense geopolitical environment and a major intervention in 2021 by the Chinese authorities in certain sectors of its stock market, has led to a lack of confidence to take on risk in the EM world. On behalf of our clients, we have had negligible exposure.
Chart 1: Global economies ranked by size from 2000-2022 and estimated ranking in 2028.
One exception to this lack of confidence in the sector is India where the economic and structural backdrop looks exciting. India is expected to be the 3rd largest economy, growing from 3.1% to 4.4% of world GDP by 2028.
Source: Bloomberg.
Chart 2: Equity market capitalisation ($tn) as at 15th April 2024.
India is currently the 5th largest stock market by capitalisation (4th if you count on and offshore/HK Chinese markets as one).
Source: Bloomberg
This optimism is based on the following key factors:
Favourable demographics. The median age of the Indian population is 29 compared with 38 in the US, 37 in China and 43 in the EU.
Rising urbanisation. The expected rise of manufacturing will see the labour force shift away from rural to urban areas. India is the least urbanised among other EM economies, which means huge growth potential.
Government capital expenditure push. Very large infrastructure projects are underway.
Net exports have risen significantly in the last 5 years including technology. iPhone production in India has grown from 1% to 25%, at the expense of China. Walmart’s imports from India have grown from 2% to 28% in the last 5 years.
Business reform. India has improved its ease of doing business, ranking from 142nd in 2014 to 63rd helping strong growth in start-ups. Unicorns - companies with a market capitalisation of $1bn - have gone up over 100 times since the start of the last decade.
Strong earnings growth and well-run companies. A stock market that also covers mega themes such as AI and climate change.
In the last three years foreign investors have been net sellers of Indian equities while domestic investors have taken up all the slack. The market currently trades close to its 15-year average at 16X earnings but with a strong growth outlook.
For our clients, we think this is an exciting long-term opportunity.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
Lead image: Gujarat International Finance Tec-City, known as GIFT City, is a central business district under construction in the Gandhinagar district, India.
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