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Many asset managers assume a zero-sum game between Developed Market (DM) economies and Emerging Markets (EM) economies. However, this excludes macroeconomic data and empirical observations. Indian equities stand as possibly the greatest case in point and have been witnessing an upsurge in recent time on the back of a number of structural reforms.
Macro Trends
The International Monetary Fund (IMF) estimated that the Indian economy’s GDP in real terms will display a growth rate that would outstrip that of most Emerging and Developing Asian countries as well as that of all Advanced Asian countries over the course of this year and the next, at the least.
The expectation is that India will grow by 5.9% in FY 2023–24 and by an average rate of 6.1% over the next five years. This growth story isn’t necessarily a novelty. Experienced “India watcher” investors have long noted that India’s growth rate was second only to that of China among BRIC countries since the early nineties until around 2014 – when India’s growth rate skyrocketed to first place.
In May this year, Morgan Stanley’s India Desk highlighted ten factors that have been boosting growth. Chief among them are “Supply-side Policy Reforms” with two components:
A corporate tax rate that was already competitive against nearly every Advanced Asian and most Developing Asian economies is projected to be further liberalized for companies commencing manufacturing before 2024 ends
Infrastructure completion progress have been at all-time highs for the past eight years
Other factors include the fact that Indian companies are at 12-year lows in impaired loan ratios (with corporate debt expected to moderate down from 62% in 2014 to 50% of GDP by the end of the current year), digitalization of social spending easing transfers to beneficiaries while whittling down waste and losses due to fraud, flexible inflation targeting since 2014 which effectively decoupled the Federal Reserve’s rate hike cycle from that of the Reserve Bank of India (RBI), and strong multinational corporate sentiment leading to increasing share of exports.
Morgan Stanley goes on to state that the decade to come will resemble that of China during the five years around the Global Financial Crisis (GFC), with GDP and Productivity differentials heavily in India’s favour.
Unlike China’s growth story – which was largely fuelled by the benefits of exports having a leading action on domestic consumption – India’s manufacturing exports seem to be led by increasing domestic consumption trends, which is estimated to have a nearly 9.2% Compounded Annual Growth Rate (CAGR) over the next decade. In parallel, credit growth is expected is expected to have a 17% CAGR over the next decade.
Overall, Morgan Stanley declares that “New India” will drive a fifth of global growth for the rest of this decade.
A month prior to this release, Deloitte noted that while India’s GDP trajectory was impacted by restrictions necessitated by the global COVID pandemic in the more immediate term, the growth rate of growth is estimated to continue staying strong under both optimistic and pessimistic scenarios.
One of the main – and often-cited – reasons for a bearish perception on Indian economic growth has been the massive web of regulations originally set up when post-Independence India was conceived as a command economy, with additional layers of regulations built on top to enforce this. Earlier this year, the Indian government did away with a massive 39,000 points of regulatory compliance and 3,400 legal provisions to promote ease of doing business. In late 2021, it had done away with 22,000.
As a result of this as well as the aforementioned tax reforms, Amundi Asset Management (a unit of Credit Agricole) estimated in May that capital expenditure (CapEx) outlays for a vast array of manufacturing industries – ranging from batteries and food products to pharmaceuticals and semiconductors – will be massive and variegated in the years to come.
While the overall macro outlook by virtually institutional firm is strongly positive, S&P Global Intelligence highlighted a key bottleneck of concern: infrastructure. Despite India’s significant infrastructure investments (about 35% of GDP), the government estimates that it requires US$1.5 trillion in infrastructure investments over the next decade. Outdated infrastructure – especially in power and transportation – criss-cross the nation and are the target of substantial expenditure for upgrades. In fact, India’s only sovereign wealth fund – the National Investment and Infrastructure Fund (NIIF) – was established in 2015 solely to fund the infrastructure sector. S&P believes that corporate growth and investments can possibly be hampered if this “infrastructure deficit” doesn’t continue to receive attention and remedy. While the S&P report was published in 2016, it’s always a very valid argument for any country’s economic growth.
Equity Market Trends
As of the end of this past week, the Indian stock market’s total market capitalization has been comfortably been breaching all-time highs for some time now.
What’s quite interesting is how tight the relationship of the market has been with respect to the total GDP, both with or without the reserve bank’s assets factored in, over the past decade as well as the current one.
Under the market valuation zone classification method, the Indian stock market is deemed as being fairly valued in both the classical as well as the modified method.
In terms of price performance, this market discipline remains evident. From 2018 till the present, the NIFTY 50 (Large Cap), MidCap 150 and SmallCap 250 indices show nearly identical convictions – with the MidCap inching forward and close to surpassing the performance of the NIFTY 50 benchmark.
In addition, the Price to Book (PB) Ratio for all three indices have been 3-5X range for this year – as compared to the nearly 10-11X for the Nasdaq-100 and 3-4X for the S&P 500.
Arguably, the most striking aspect of the Indian stock market has been its Price to Earnings (PE) Ratio discipline. The benchmark NIFTY 50 has mostly remained in the 20-26X range for most of this current century.
Excepts for dips during the GFC and other key points of the noughties as well as an earnings drop (while stock valuations remained high) during the course of the pandemic causing ratio inflation, the benchmark has displayed a particularly strong tendency for reversion back into this ratio range over the past eight years.
The Story Continues
It should come as no surprise that experienced “India watcher” professional investors have been left awestruck in recent years. Considering the fact that the Indian government is setting such ambitious pathways for rapid industrial growth while also working on developing the world’s largest healthcare and housing systems for the underprivileged and also making a massive push for renewable energy infrastructure gives many of these veterans the inkling of a notion that an ambitious, intricately-designed and well-balanced paradigm shift is in motion.
On the 23rd of June, during Indian Prime Minister Narendra Modi’s address to a joint session of the U.S. Congress (which received 15 standing ovations and had to be stopped for an applause break 79 times), he said:
“When I first visited the U.S. as a Prime Minister, India was the 10th largest economy in the world. Today, India is the 5th largest economy. And… India will be the 3rd largest economy soon. We’re not only growing bigger but we’re also growing faster. When India grows, the whole world grows.”
It’s entirely logical to consider that nobody has ever aimed to just be at 3rd place. One can wonder if only one decade will be enough for the “New India” story or if there are a few more afterwards. Time shall tell.
For sophisticated investors considering making a play on the Indian market’s trajectory, two newly-launched ETPs provide magnified exposure to the same on both the upside as well as the downside.Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
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Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
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Terms and Conditions
Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
