The benchmark indices in Japan and India have both rebounded around 40% over the past 12 months. Why do you think that is?
Amit Goel: Japan is all about capital management. We know growth is very slow, but these companies have been weak on capital management and shareholder returns, and there are all these talks about improving shareholder returns and a change in culture, which I think is a big driver. For any slow-growing economy, that's the biggest change you can have. And I think that's what driving Japanese markets. Maybe there is some tilt to positive growth because of this geopolitical tension and diversification of supply chains. The US wants to import less from China and more from other regions, and Japan might benefit from that. But the large part is capital management.
When it comes to India, this is the exact opposite. It's all about growth. India is the fastest-growing emerging market. It's one of the youngest emerging markets. The median age is 28-29 years. India is adding 10-12 million people to the working age every year. We all understand that human capital development in India is great.
So it's all about whether we can have high conviction on that long-term growth, which is 6-7%. And I think what has happened in the last two to three years is that the current government has put in the building blocks for us to have a higher conviction on that growth. There has been increased investment in infrastructure, there has been increased investment in manufacturing. They're sitting at a good point in geopolitical tensions as well because the West needs India more to counterbalance what they see in Asia.
So I think if you put all that together, that optimism adds to your increased visibility and conviction on long-term growth. And I think that's what driving Indian markets in the current environment.
Are there any headwinds that you think investors should be aware of when investing in these regions?
Amit Goel: You have to see how long this capital management continues and whether it is structural or just cyclical. And you need to see whether we can have a longer-term view on Japan because growth is still going to be slower.
With respect to India, while we speak about these capital investments, which are the building block for long-term growth, we also see a slowdown in consumption in India. India is still a very medium-income market. The average GDP per capita is $2,500, which is still low versus any other emerging market or developed market. And we have seen consumers at the middle and bottom of the pyramid being hit very hard by inflation.
I think the weaker part of the Indian economy has been weak consumption and probably some concerns on job growth. But these are long-term factors. I mean, as I said, it's a young country and if you have to grow sustainably long-term, you have to have the right base to grow from. Jobs have to be created by infrastructure, manufacturing, and global competitiveness. I think that's what is getting in place. I think what is happening is that while some parts of the market are weaker, I think there's a firm belief that is more cyclical while the structural things are getting in place. I think those concerns - yes, they're very valid on the ground, but I think there's a belief that we will get them cyclically on the upside in coming years as well.
Japan vs India: Which will have the best growth over the next 10 years?
Amit Goel: I think it's a very simple answer, as you said. India is today growing at about 7% real GDP. If you think about a range of long-term growth for India, I would say you can, with some conviction, put 6-8% as its long-term growth. And when I say long-term, it's the next five to 10 years, which will be one of the strongest growth in any emerging market for the size of the economy. You have 1.4 billion people at $2,500 GDP per capita growing at 6-8% real, 8-10% nominal. This is very high growth for any large economy to have. And if we have that growth, I think there will be categories, particularly consumer categories and discretionary categories, which will grow much faster than that. I think that is the best opportunity that I see around in emerging markets.
Where are you finding the most opportunity in India right now?
Amit Goel: I won't talk about specific stocks, but if you think about some of the stocks in India, which are more tied to consumers, when I say it's a very medium-income country, and the average income is $2,500, you have a huge middle-income class - 200 million households, which are earning anywhere between $2,500 to $5,000 as household incomes. They're consuming very basic needs. I mean basic housing, basic lifestyle, and basic education. They're not spending on discretionary items. Auto penetration in the country is very low. Consumer durable penetration in the country is very low. We're talking about some of these categories where penetration is single digit and if this country is going to grow at the rate that I talked about, we are talking about doubling median incomes in 10 years' time. We're talking about tripling medium incomes in 12 to 15 years' time. You will see a massive penetration uplift in some of these consumer discretionary categories.
That's the one space which looks very interesting to me. Private sector banks - which are again tied to wealthy consumers. As you consume more of the discretionary categories, you also leverage more. You buy houses, you buy cars, you take loans. And some of the private sector banks in India, which are I believe some of the greatest financial institutions that I see in emerging markets, are trading at very reasonable prices. They can compound at very good double-digits, and they have very good management team governance structures. Some of these opportunities I think are unparalleled to what I see around. So I won't name a stock here, but I think that a group of companies within some of these sectors looks very good to me.
