Earlier this year we highlighted our long-term positive view on India equities in our outlook piece titled “India Market Outlook 2023″. Indeed, after a weak 1Q 2023, the MSCI India clawed back its loss with a 11% rally in 2Q 2023, showing up as the best performing Asia market (in USD terms). In this update, we take a quick recap behind its performance card in 1H 2023. While there could be some consolidation in the near-term, we reiterate our long-term positive view on the structural growth of India.
TOP DOWN
India remains one of the fastest growing economies globally, with a forecasted FY23/24 Gross Domestic Product (GDP) growth of 6.3% by the World Bank1. Its long battle with inflation has shown signs of softening, giving hope that we are past the peak now. External balances have improved, while current account deficit has narrowed. While the Reserve Bank of India (RBI) has paused rate hikes over the past two meetings, it has maintained that they are on a data-dependent mode. While foreign flows have been weak in 1Q 2023, we saw meaningful inflows since April.
BOTTOM UP
We see three key reasons why India presents itself as an exciting investment opportunity.
1. India is undergoing a manufacturing renaissance, poised to become a potential factory of the world. Several reasons have attributed to this, such as US-China trade wars prior to Covid, China’s extended lockdowns during Covid as well as China’s current demographic trends. We see infrastructure and banks as direct beneficiaries of the capital expenditure boom.
2. Second, the Modi government has undertaken a series of positive reforms over the years to boost the economy. These include cutting down red tape for goods and transactions to take place across states by setting up a uniform GST policy, removing roadblocks via tweaks in regulations and facilitating an infrastructure that spans across rail, road, and power assets. With further implementation of tax benefits to attract foreign direct investments into India, the infrastructure side of the economy will certainly be booming.
3. Third, the ongoing rise of a middle class with a growing purchasing power will fuel higher discretionary spending and result in further credit penetration. Indeed, the use of technology has enabled banks to extend their reach, while allowing smaller businesses and individual consumers to gain access to more sources of credit. We see this as just the beginning of a multi-year tailwind for India.
VALUATIONS
Expensive valuations have always been a primary deterrent to investors when it comes to investing in India. As at 4 July 2023, MSCI India 12M forward Price-to-Earnings (P/E) ratio has come off its highs of 24 times, hovering back around 20 times, though still above its long-term average at 17 times. It is also trading at a premium relative to the MSCI Asia Pacific ex Japan Index (MXAJP). That said, we are of the view that the slightly higher valuations are supported by an attractive growth story. As the adage goes, everything comes at a price.
LIONGLOBAL INDIA FUND
The LionGlobal India Fund aims for medium to long-term capital appreciation by investing in India equities and equity-related instruments. While India market has done well across board, performance has been very differentiated, in an increasingly a stock picker’s market. We are more exposed to domestic growth names. We are overweight Media, Consumer Discretionary and Financials. We are underweight IT services, Utilities and Staples.
*All data are sourced from Lion Global Investors and Bloomberg as of 30 June 2023 unless otherwise stated.
1Source: World Bank, “Indian Economy Continues to Show Resilience Amid Global Uncertainties”, 4 April 2023
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