Talking Heads – Indische Aktien könnten andere Schwellenländer in den Schatten stellen

This is an article based on the transcript of the recording of this Talking Heads podcast 

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing Indian equities. I’m Daniel Morris, Chief Market Strategist, and I’m joined by Jayesh Gandhi, Head of India Equities. Welcome, Jayesh, and thanks for joining me.

Jayesh Gandhi: Happy to be here.

DM: If we think about the investor attitudes today, there’s probably more concern about the outlook for developed market equities than emerging market equities given that we are concerned about the potential for recession in the US, at least some sort of slowdown in Europe, and this being driven fundamentally by inflation that is still quite high relative to central bank targets as you see in developed markets, hence there is less to worry about monetary policy tightening in emerging markets. Another positive point for emerging markets today is that we don’t anticipate a stronger US dollar like we had last year or rising interest rates. And if anything, we anticipate US Treasury yields to fall once the Federal Reserve finally does start cutting policy rates. Let’s start with the performance of emerging market equities relative to developed market equities. If we look at performance over the last several years, emerging equities have actually underperformed, though a lot of that has had to do with the performance of China and not necessarily the rest of emerging market equities. Nonetheless, it raises the question whether in a traditional basket approach to emerging markets as appropriate, or should investors be thinking more about a country specific approach? What do you think?

JG: We think that the basket approach can no longer work, particularly after what we have seen in the last three years. Changing geopolitics, the trade war, of course also the conflict in Ukraine is adding to the energy crisis in the world. We believe that over the next three to five years or probably longer, there will be certain emerging markets which will stand out in terms of growth, in terms of opportunities. Each emerging market will take the opportunities in the right way for their own individual growth. That is what will drive equity market returns for each of the markets separately rather than being clubbed as a basket. From an investor point of view, it will be very important to choose the right mix within their investment framework to get the returns that they’re looking for. Talking about India in particular, we believe that India has a substantial opportunity to do better than what it’s done in the last 10 years in terms of equity market returns. Not one, but multiple tailwinds exist for the Indian economy to grow significantly over the next three to five years. What we are talking about is the current economic size from USD 3.2 trillion going up to as high as USD 5 trillion in the next five years, which is a 50-70% increase in the overall size of the economy. This increase in the absolute size of the economy and nominal GDP, which would grow at a compounded rate of 10-12%, would have significant positive implications for corporate profit growth, which we think can grow at mid-teens. That would deliver returns of a similar size for Indian equities. Now, even if you take away the 3-5% decline in the currency or the or the hit because of currency depreciation in dollar terms, we are talking about high single-digit or low double-digit growth in terms of returns being delivered by Indian equities. Now that is substantially higher than what we’ve done in the last 10 years. This opportunity does exist for India and I’m pretty certain it exists for a few other countries as well. Hence it will be important for investors to choose and pick how they want to be invested rather than looking at a basket.

DM: Can you talk a little bit more about how the Indian economy is positioned in the context of this potentially global recessionary environment? But not only about what you see as the opportunities, but what are some of the key challenges for India’s growth outlook in the next couple of years?

JG: In this global recessionary environment, the Indian economy we believe will not see a recession, although there will be a significant growth slowdown. We believe that economic growth will slow down to 5.5% or thereabouts from 7.5% last year, which is a 23% decline in growth rate. However, this is largely driven by high energy prices and the high energy cost. We believe that post 2024, GDP growth could pick up in a significant manner, probably clocking back to 7% plus in real terms for the next few years. Energy is the key challenge because India continues to remain one of the largest importers of crude oil and natural gas in the world today. As the size of the economy and output goes up, so will the need to import more. That means we are talking about a large part of the import bill being funded out of domestic earnings and little being left to reinvest in growth. That could have a substantial impact in terms of low growth for the Indian economy. So, it is important for India to see that its energy needs are met by more substantial domestic energy availability, which would probably take some time. Hence, lower oil prices would be critical from a medium-term point of view for economic growth to sustain a higher level. Of course, the other key headwind that the Indian economy could face would be a global stagflation environment, where interest rates would remain high. Growth is much lower across the world. and India would also get impacted. So, these are some of the key areas where growth could be substantially lower than what we expect or the next three to five years. But if things come back in terms of energy costs and inflation cools off, we have a pretty strong growth path.

DM: We’ve talked quite a bit about the macroeconomic outlook. Let’s focus on the Indian equity market because ultimately that’s what we’re investing in. Indian equities have done spectacularly well during the last year relative both to global equities and emerging equities. Some of that has to do with the underperformance of China equities. But even relative to China, India has done well. That’s good news. The challenge today is valuations are at a pretty substantial premium. How sustainable do you see those valuations?

JG: I agree. These high valuations are unsustainable. That’s the reason why we thought that at the beginning of the year India would underperform, which is what has happened in the first quarter, where India has lagged most EMs. What that’s done is brought the premium to a more reasonable level, which is still high, but it’s a more reasonable level now than what existed at the beginning of the year. If you look at the last decade or so, Indian equities have sustained a premium over its peers to the extent of around 40-50%. That rose significantly into 2022, predominantly because India did not see the correction that global equities and EM saw. That was predominantly driven by confidence in the domestic economy, which domestic investors have. Domestic investors came in a big way and bought into Indian equities. We have seen substantial inflows coming in from domestic investors into mutual funds, particularly equity mutual funds, and that is what supported equities in 2022 for. We now see a part where probably India will continue to perform in line or better than EM in the short or medium term. We think that India goes back to outperforming as economic growth picks up and we see inflation stabilising across the world and in India as well.

DM: What do you see as the key drivers behind the performance you anticipate?

JG: The key driver is the economic growth engine and the multiple factors that are driving strong economic growth. We are a USD 3.2 trillion economy today with 1.4 billion people. The target of the government, which is quite achievable, is to take this to USD 5 trillion by 2027 and USD 7 trillion plus by 2030. There are not one, but multiple factors and multiple tailwinds and multiple investments which are going into achieving this target: changing global geopolitics and changing supply chains across the world, which allows India to gain market share. The climate change commitment that the Indian government has given which leads to a massive investment into solar and renewable energy. The new industrial policy to piggyback on the changing supply chain and changing geopolitics which promotes global manufacturing in India and positions India as one of the key global manufacturing bases for multinationals. This should boost Indian manufacturing output significantly over the next three to five years. A substantial amount of FDI [foreign direct investment] has been already committed to investing in India, in manufacturing. And of course, the large infrastructure push that the government has been putting in place. All these factors, along with a strong consumer base and a vibrant young population, make us believe that Indian growth can be 7% plus in real terms or 10% plus in nominal GDP terms over the next three to five years. 2023 can be an aberration, but from 2024 onwards, over the next five years, we see very strong GDP growth. What we have seen in the last three decades or so is there is a strong correlation between strong nominal GDP growth, corporate profits and equity market returns – a 1-to-1 correlation. Strong nominal GDP growth in India leads to strong corporate profit growth and translates into strong earnings for corporate profits and leads to strong earnings and returns for equity investors. We don’t see any reason why this correlation should change in the next three to five years. So, as the Indian economy goes from USD 3.2 trillion to USD 5 trillion, we will see corporate profits almost doubling from USD 120 billion to roughly USD 250 billion by 2027. That should translate into a much higher, 50-70% increase in market capitalisation for Indian equities. If I were to translate the increase in absolute GDP growth in a yearly compounded number, that would translate to a double-digit number over the next three to five years. That is the return we expect Indian equities to deliver, even after taking off some rupee depreciation, which is around 3-5% every year. We are still talking about high single-digit dollar returns from India equities over a three to five-year period, which can be substantial for a global investor. So, we believe that the Indian economy is uniquely positioned, and Indian equities are uniquely positioned to deliver substantially better returns as they have done in the last decade in the next five to 10 years as well.

DM: Thank you for joining me. JG: Thank you for having me. And happy investing.