Why capital management firm believes India is good bet as part of its emerging market strategy
Opinions vary as to whether India equities are too expensive. Despite this debate, many larger investment houses are turning to India as a core part of their emerging market strategies. This week, JPMorgan announced plans for a significant expansion of its operation in India, saying the country is experiencing rapid growth and increasing financial potential.
Morgan Stanley says India is on track to become the world’s third largest economy by 2027, surpassing Japan and Germany, and have the third largest stock market by 2030, thanks to global trends and key investments the country has made in technology and energy. Additionally, three megatrends – global offshoring, digitalization, and energy transition – are setting the scene for unprecedented economic growth in the country of more than one billion people.
India’s GDP could more than double from $3.5 trillion today to surpass $7.5 trillion by 2031. Its share of global exports could also double over that period, while the Bombay Stock Exchange could deliver 11% annual growth, reaching a market capitalization of $10 trillion in the coming decade.
Is India too expensive?
Although many investors feel India equities are too expensive, investors at Aubrey Capital Management do not.
“We should like to address the regular refrain that Indian equities look expensive,” says Rob Brewis, fund manager at Aubrey Capital Management.
“In 2020 and 2021, COVID lockdowns and subsequent re-openings distorted the historical trend, but India literally roared back to life after COVID and, by the end of 2021, the market had perhaps run ahead of itself. The Nifty 50 Index reached a PE of 25x, well above the decade long range of 18 to 22x and then it could be argued that it was expensive.
“But let’s dwell on that decade-long range for a second. In fact, this was a period of relatively modest earnings growth for the Nifty, as India was still digesting the previous investment boom and bust. Despite this, and despite trading at a distinct PE premium to nearly all other markets, India was among, if not the best, performing emerging market over the period.”
Brewis adds, “Recently, the Nifty has broken out to a new high, but it is still only a little above where it was in late 2021, and earnings have grown strongly since then. As a result, it is currently sitting just below 20x, so marginally below the 10-year average, despite being on the cusp of another investment upcycle and, most likely, the fastest growing major economy in the world for the foreseeable future.
Little debt and strong cashflows
“Most Indian companies are starting this cycle with little debt and enviably strong cashflows. It might be worth noting that during the last upcycle, Nifty earnings per share compounded at 31% (2003-2009), and while we can’t promise the same again, it helps to highlight the potential.
“We focus on the consumer, which we believe will continue to be the best way to invest in the Indian story, and partly as a result, our portfolio is at a premium valuation to the broader market, as it has always been. But this has not prevented the Indian portion of our GEM portfolio returning well over 2x the MSCI India return since inception in 2012 until today.
“Is India expensive? We don’t think so. Certainly not relative to history, and not relative to its potential.”
Aubrey has had approximately one-third of its GEM fund invested in India since 2014 when the transformational Modi government took charge. The company says that it is important to note that it invests in companies, not countries. As a result, its Indian exposure is high because its investors have found companies in India that meet the organization’s strict investment metrics.
