How to plan your investments when Indian equities are more attractive than global peers

The Indian stock market has been one of the best-performing markets in the world over the last 3 months. Over the last 1 year, 3 year, and 5 years, the Nifty 50 has delivered a CAGR of 21.6%, 23%, and 12.4%, respectively. This strong performance has been driven by the confluence of a number of factors. Notably, over the last 2 years, two very significant events have transpired:

India has become the 5th largest economy in the world and the fastest growing in the world. India’s population is now the youngest anywhere in the world, and China’s population has now started to age!

Additionally, corporate earnings are strong and corporate India has unlevered balance sheets. Moreover, unlike their Western peers, Indian banks have the cleanest balance sheets having gone through a prolonged period of cleansing since 2014.

The recent merger of HDFC and HDFC Bank has resulted in the merged entity becoming the 4th largest in the world in terms of market capitalisation.

Most importantly, perhaps in the rapid digital transformation that is underway in India. With the building blocks in place over the last 7-8 years, India’s adoption of digital technologies has now become a template for the world and India is the only country in the world that has created public digital infrastructure assets to transform society at large.

For the first time in many years, both the macro picture and the micro picture for India are extremely benign. The manner in which India has navigated through the pandemic and has been able to deliver 2 bn+ vaccines in two years has been stupendous.The manner in which India has been able to navigate through the geopolitical challenges brought about by the Russia-Ukraine war has also been very strategically done to the long-term advantage of India.

With the problems in China continuing to compound and with the above tailwinds, India is seen as an extremely attractive destination for investments by global investors. An interesting facet is that over the last 10-12 years, developed markets, more specifically represented by the S&P in the US, have outperformed emerging markets.

We would make the argument that going forward, this is likely to change with emerging markets and India doing relatively better and that has profound implications for global investors.

Russell Napier makes a compelling macro argument for India, highlighting that the Western economies with massive levels of debt increasingly will accelerate their financial repression programmes.

These programmes would be to the detriment of long-term savers and investors in those markets, and over time, capital will seek to be invested in those markets where growth prospects are far better and where financial repression is not explicitly required as debt levels are more manageable – India will be a significant beneficiary of this change.

The Indian market offers a wide range of opportunities across sectors and segments. The sheer scale of the opportunity will result in consistent returns over the longer term from businesses across sectors such as financial services, consumer discretionary, consumer staples, technology, and consumer internet.

While the opportunities are plenty, it is incumbent upon investors to be discerning. Investors should adopt a 5- 10 year horizon, invest in businesses with strong governance standards, which are capital efficient, and where the business models will be able to withstand shocks, which are inevitable.

At the end of the day, there will be many fads and short-term trends that will fleetingly seem appealing but investors will need to be mindful of not getting carried away and will need to back the right businesses.

It’s important to remember that not all themes make for great investments and all great investments only end up delivering outcomes over a longer time horizon.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)