Foreign investors are tapping into India's economic growth, but valuation premiums pose cautionary risks
In an exclusive feature by Benefits and Pension Monitor, in partnership with iShares by BlackRock, the potential of granular single-country investing in emerging markets (EM) is explored.
The feature highlights how focusing on sector-specific investments in developed markets also applies to specific opportunities within EMs, such as India.
David Jones, director of iShares investment strategy at BlackRock, and Rohit Gupta, VP, and quantitative researcher at MSCI, emphasize that India is a key emerging market benefiting from a global shift toward diversified supply chains.
In a special edition of the BPM Talk podcast, the experts discussed how India offers unique growth prospects, both in the short and long term, by capturing local developments and aligning them with global forces.
Investing in India, they noted, allows investors to “reap benefits from structural growth” while avoiding the risks tied to broader EM indices.
India’s economy has shown exceptional growth. In 2023, global exchange-traded product flows into Indian equity exposures reached US$6.8bn. This reflects strong foreign investor interest.
The weighting of India in key indices like the MSCI Emerging Market Index has doubled over the past four years to 17 percent. Investors are drawn by India’s annualized GDP growth and the expansion of its domestic markets.
However, Indian equities also present cautionary risks. These include valuation premiums, as Indian equities have consistently traded at higher valuations than other emerging markets.
Foreign ownership limits, capital inflows and outflows, market-entry regulations, and the availability of investment instruments are also considerations investors must take into account.
India’s favourable macro-structural trends provide growth opportunities, which are further driven by digital transformation, infrastructure development, the realignment of global supply chains, and sustainability initiatives. These trends are expected to continue in the coming years.
Single-country investing presents opportunities in sectors such as IT, pharmaceuticals, telecommunications, and automobiles, which benefit from international revenue sources. The Indian IT sector, for example, derives 94 percent of its revenues internationally, mainly from the US and Europe.
While the opportunities in India are promising, Gupta advises caution, particularly regarding valuation premiums, market accessibility, and regulatory concerns in Indian equities. Investors are urged to keep these risks in mind when incorporating India into their portfolios.
