India: Getting Too Big To Ignore

The Indian economy has recovered strongly from the COVID pandemic. The IMF forecasts that India’s economy will expand 6.1% this year — one of the fastest rates of any major economy — and 6.8% in 2024. India is expected to contribute 15% of 2023’s global economic expansion and drive one-fifth of global growth this decade.

While India is striving to realise its economic potential, its equity market is also making big strides. India accounts for more than 15% of the MSCI Emerging Market (EM) Index, up from 6.7% in 2009. It ranks second in terms of weight within the MSCI EM Index, next only to China. For investors, India is quickly becoming a market that is too large to ignore. 

India and China: Not mutually exclusive

The Sensex Index outperformed the China A-share and H-share markets by 18.1% and 12.5% respectively in 2022. Some investors believe that this strong performance was because foreign investors were reducing their exposures in China last year, given its slowing economy and embattled property sector. As such, there are concerns that the optimism over China’s economic re-opening this year may result in foreign investor outflows from India.

In reality, in 2022, India suffered the largest foreign investor outflows it has seen in the last 12 years. It was rising domestic inflows (which tend to be sticker) that helped sustain the equity market. We believe that as global investor risk sentiment improves towards the Emerging Markets (EMs), both India and China will benefit from foreign investor inflows. While EM funds have recently increased their exposures to India, the average weight remains at multi-year lows. There is significant room for exposure to rise.

FDI Inflow

The recent banking sector volatility in the US and Europe could result in tighter lending standards and a further slowdown in the developed economies. India is less vulnerable to slowing global demand as exports currently make up less than 20% of GDP. On the other hand, demand for one of India’s key exports – Information Technology services – is expected to be relatively resilient. It has been observed that tech spending has increasingly decoupled from negative macro events over the decades. Relative to GDP growth, global IT services spending dipped 3x in 2009 during the Global Financial Crisis, 0.8x in 2020 and 0.3x in 2022 during the COVID-19 pandemic. Given higher technology wage inflation in the developed economies, India remains an attractive outsourcing destination.

This has important implications for consumer spending and economic growth as the IT sector is an important job creator for India. The rising affluence of the Indian consumer presents a structural opportunity for investors. India’s per capita spend on Fast Moving Consumer Goods (FMCG) stands at USD46 – Indonesia’s and China’s spending is 2x and 3x higher respectively.

In the 2023-2024 budget, India’s capital spending outlay was increased by 33% to Rs10 tr (USD122.3 bn), lending a boost to infrastructure development. With research suggesting that the multiplier for capital expenditure stands at 2.45 for India, this is likely to have a positive impact on economic growth over the longer term. Sectors linked to the capex upcycle such as Financials, Industrials, Cement and Steel may benefit.

Resilient India

As India seeks to ride its multiple tailwinds, there are also challenges, such as the country’s high unemployment and sticky inflation. Nevertheless, despite these challenges, the resilience of the market and its growing weight in the MSCI Emerging Markets Index reflect the appeal of India’s structural story.

Commentary by Anand Gupta, Portfolio Manager at Eastspring Singapore

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