After one of the strongest global performances of 2021, which saw it rise 21%, the Indian stockmarket has – in common with others around the world – been on a downward slope so far this year. As of the end of April, the BSE Sensex index had lost 4% year-to-date, primarily in the face of geopolitical tensions. To put that in context, however, the S&P 500 had fallen almost 13% and the MSCI World slightly more, so India has held up relatively well in comparison.
Nonetheless, there is a big question facing UK investors who participated in last year’s rewards: what are the prospects for India for the rest of 2022 and beyond? Or, to put it another way, was 2021 a flash in the pan or the consequence of powerful structural shifts?
In the past, investment in India has been flighty at best. Increasingly, however, domestic capital is being invested and staying put. While foreign capital continues to flow in and out – largely dependent on sentiment towards broader emerging markets – an average of 2.6 million domestic stockbroking accounts were set up per month in financial year 2021/22.
This compares with an average of 400,000 new accounts per month in 2019/20, and these investors are proving less fickle. There is still plenty of room for the domestic investment sector to grow too – Indian households currently invest only 7% of household assets in equities, versus an average of 30% in other major emerging markets and 50% in the US.
Economic supercycle
There is compelling evidence to suggest that, while returns are bound to fluctuate from year to year, the fundamentals driving this market – and specific companies and sectors in particular – are rooted in the rapidly evolving economy and will persist over the long term.
That is a view underpinned by the recent International Monetary Fund forecast that India will be the fastest-growing major economy globally in 2022 and 2023, as well as the Centre for Economics and Business Research’s prediction that India will become the third-largest economy in the world in GDP terms by 2030. Indeed, whereas countries such as the US are in the late stages of their economic cycle, with the boom days of their latest expansion behind them, India is now arguably entering an ‘economic supercycle’.
Jefferies Equity Research identifies several factors set to drive growth in the coming years. First – and the primary force behind the evolving cycle – is growing demand among the Indian population for residential property. This is supported by the fact that mortgages are at their most affordable for 20 years and home loan payments as a proportion of income now stand at 28%, compared with a high of 58% in 2008.
Second, the banking sector in India is positioned as conservatively as at any point over the past two decades, as it emerges from the decade-long fallout of a period of massive overinvestment prior to 2013. Consequently, latest available data shows that bank capital ratios are at their highest for 10 years, and the proportion of bad loans is falling steadily.
A third point is that corporate India has been deleveraging since prime minister Narendra Modi came to power in 2013, and company balance sheets now have their lowest levels of debt in a decade. Corporate profitability is also at a very low level, with latest data showing it is hovering around 2%, compared with a typical level of around 3.5%.
Again, overextension between 2009 and 2013 has had to be ‘digested’ by companies over the past seven years, and it is only recently that excess capacity can finally been absorbed. This means companies may at last be in a position to start making capital investments again. If corporate profitability simply returns to its long-term average, annual earnings growth is predicted to be 23% for the overall Indian market. For individual companies in sectors with strong fundamentals, this figure could be even higher.
Structural tailwind
A useful top-level indicator of domestic economic growth is the year-on-year increase in credit. Indian GDP for 2022 is estimated at 9% and credit growth might typically be expected to be around 50% higher – yet it is currently only at 8%. Credit should acts as grease for the cogs of the economy – it enables consumers to buy a vehicle or a house, or invest in the expansion of their small business, giving them a step up economically.
As people take jobs in the cities and leave the countryside, they stop living at a subsistence level, have more disposable income and increasingly become discretionary consumers. This is a trend that is set to run for the long term, with 60% of the population still in agriculture.
Importantly, the Indian economy is domestic consumer-based, with approximately 60% of GDP generated via consumption in 2020. Compared with other emerging markets, therefore, it is impacted less by the fortunes of the export-consuming US economy.
Despite this, US interest rates could still impact capital flows in or out of the Indian market from foreign investors who group all emerging economies together and do not appreciate their differences. China, for example, was still reliant on exports of goods and services for more than 18% of its GDP in 2020.
For those able, however, to look beyond the regional headlines and appreciate the unique situation of India – poised at the beginning of what we consider to be an economic supercycle – allocating to its domestic growth story and staying the course could prove a very smart move indeed.
Abhinav Mehra and Andy Draycott are the investment team responsible for the CC Indian Subcontinent Fund
