India continues to grow at an impressive pace, but this has been reflected in financial market prices. Are there still opportunities for investors?
- The Indian economy grew at a pace of 8.4% in the October-December quarter
- It is picking up international investment moving away from China
- Its economic growth is likely to remain impressive, but is it already reflected in markets?
When India goes to the polls on 19 April, the result is thought to be a done deal. Prime Minister Narendra Modi is likely to be returned for a third term, a ringing endorsement of the economic transformation he has put in place since coming to power in 2014.
The economy continues to grow at an astonishing clip - 8.4% in the October-December quarter . It has consistently beaten market estimates of its growth. It is currently seeing significant expansion in its manufacturing sector as it draws in international capital trying to diversity away from China. The government has put specific incentives in place to attract global manufacturers and help it compete with Thailand and Vietnam.
This is likely to give it a strong pipeline of growth for some time. Government investment in infrastructure continues at pace, and private consumption – the largest share of the economy – is also growing. In short, it is an economy firing on all cylinders.
This strength has been reflected in the country’s stock market, with the MSCI India index up 39.4% over the 12 months to the end of March . That puts it around 30% ahead of the wider Emerging Markets index, and even sees it competing with the US’s Magnificent Seven on returns. It also means India has become an increasingly important part of the MSCI Emerging Market index, while China’s weighting has dropped. That is bringing the attention of international investors.
The question is whether they are too late. Valuations for Indian equities look expensive relative to their peers. The MSCI India trades on a forward P/E of 26x, compared to just 12x for the wider MSCI Emerging markets index. Indian fund managers argue that they have always been expensive, a reflection of the superior governance and performance of Indian companies, the country’s relatively stable regime and the absence of any major financial crises. They suggest they can still find value in parts of the market that have been left behind.
However, even they will admit that there are pockets of the market that look particularly expensive. The small and mid cap sector, for example, has been a focus for engaged domestic investors, and prices are high. Equally, it is the nature of emerging markets to go through periods of ebullience and retrenchment.
The Indian market has shown some weakness relative to its emerging market peer group since the start of the year. If this continues it may allow investors to capture the undoubtedly exciting opportunities in India at lower cost.
