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Numerous positive structural and cyclical factors are pointing towards a major economic upcycle in India over the next five to six years, in our view, creating a range of potential investment opportunities. We believe India’s market is supported by an evolving investment universe, powerful demographic trends, increasing urbanisation and rising wealth, export growth, geopolitical tailwinds and a supportive policy regime. These factors are coalescing at a time when the corporate deleveraging cycle of the last few years is coming to an end and a new upcycle in profitability could be beginning.
The investable landscape in India is in the process of transforming, in our view, with more internet, media and e-commerce businesses likely to come to market over the next two to three years. These industries currently make up less than 1% each of the MSCI India Index, compared to 16% – 18% each in the MSCI China Index (Figure 1).1 We believe the companies starting to list in public markets in these sectors will provide a fertile new investment area for India investors.
India’s young population is well understood, with a median age of 28, compared to 38 in the US and China, 46 in Germany and 48 in Japan.2 Importantly, India’s working-age population is also rising and is set to see a long, high plateau over the next two decades whereas it has already peaked globally, including in China and Brazil.3 This rising trajectory is promising as the higher working-age population increases labour supply, which is a key input into economic growth.
In the next 15 years, India’s urban population is also set to increase by 125 million people.4 Notably, the average annual household consumer wallet size in India today is expected to increase by 2.4x between 2020 and 2030. Over that time, the share of discretionary spending is projected to rise from 24% to 40%, supporting numerous industries.5 These forces are combining with a decline in interest rates from 8% to 4% over the last decade to drive strong demand for and affordability of urban housing.6 We believe it is likely that this demand strength will persist for years to come, even as domestic rates begin to increase from current lows.
Economic rebounds in developed markets — particularly the US and Europe — are resulting in strong demand for India’s exports. Export growth today is at the highest level in the last decade, led by strong demand for BPO and software service exports.7 Global digitalisation trends are also long-term structural forces supporting India’s IT outsourcing industry, which has positive flow-on effects for India’s domestic economy through job creation and improving income levels.
Ongoing political tensions between the US and China are causing companies across a range of industries to actively seek to diversify their supply chains. India is potentially the key beneficiary of this trend. We believe frictions between the US and China are structural and unlikely to diminish, suggesting this environment could benefit India for years to come.
India’s 2022 National Budget continued the country’s economic reform trend that includes 2017’s nationwide goods and services tax, 2019’s corporate tax cuts and the 2021 budget’s landmark industry privatisation, investment incentives and tax reforms. It targets a capex-led growth push and emphasises logistics infrastructure, the “Make in India” programme and ESG and digitalisation themes. India’s government plans to spend US$1.5 trillion on national infrastructure over the next five years,8 providing significant opportunities for engineering, construction, building materials and the capital goods value chain.
In our view, these forces are coming together to drive a new corporate profit cycle in India, which we believe is likely to continue for the next five to six years. We think the timing here could not be better, as it coincides with the end of the deleveraging cycle that that has been playing out since 2015, leaving companies in far stronger financial positions than they were just a few years ago. We believe Indian companies are well positioned to expand their operations into rising demand and generate compelling returns for shareholders for years to come. We see opportunities across a range of sectors including consumer goods, housing, autos, property developers, manufacturing industrials, IT services and financials.
So, how much of our bull case is already priced in? India has traded at higher valuation levels than other emerging markets for years and its current valuations are high again following recent outperformance. However, over more than 20 years, the MSCI India Index has outperformed the MSCI EM Index by 2.3% annualised despite these high valuations.9 Notably, today’s profits are at their lowest level in 30 years, contributing to the current optically “high” P/E valuations of the Indian market. If company earnings improve meaningfully over the coming years, as we expect, valuations are likely to normalise. We are optimistic about both the economic and company-level opportunity set available to investors in India today. We believe the combination of structural and cyclical forces are likely to result in a multiyear upcycle, driving improving fundamentals and profitability across a range of industries that are not fully priced in today.
1Source: MSCI India and China industry weights as at 31 January 2022. | 2Source: CIA World Factbook, 2020. | 3Sources: Estimates from UN World Population Prospects, IndiaDataHub, Macquarie Research, November 2021. | 4Sources: UN World Urbanization Prospects, Our World in Data (projections from 2022 to 2050). | 5Source: Data and estimates from Macquarie Capital, “India Consumption and Demographic Tailwinds”, 23 November 2021. | 6Sources: US Federal Reserve, RBI, HDFC, SBI, Propequity, Jefferies. Data from 2001 to 2022. | 7Sources: CEIC, Haver, RBI, Morgan Stanley Research. | 8Sources: India’s Ministry of Finance, Jefferies. | 9Sources: MSCI India Index and MSCI Emerging Markets Index. Data from 1 January 2000 to 28 February 2022.
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