Amid all the hand wringing at the end of a difficult year for investors, the exception that proves the rule is the Indian stock market. Up more than 6pc since the start of 2022, it has left its peers standing. The MSCI World index is down nearly 17pc over the same period.
This year has been no flash in the pan either. If you had invested $100 in the FTSE 100 20 years ago, close to the bottom of the dot.com bust, you would have $187 today. But the same amount in India’s Nifty 500 index would be worth more than $2,100 .
There have been wobbles along the way. The financial crisis and Covid pandemic were difficult. But while attention has focused on the Chinese economic miracle, India has been quietly delivering. And now the Nifty has reached a new all-time high, leap-frogging the previous peak reached at the end of last year.
So, what is it about India that’s so appealing to investors? Well, it’s quite a long list. Let’s start with some big numbers. Morgan Stanley estimates that India will be the world’s third largest economy within five years. Its GDP is forecast to double over the next 10 years from US$3.4trn to US$8.5trn as it compounds at an annual growth rate of about 6.5pc, nearly twice the forecast growth of its big Asian neighbour.
While economic growth is not always translated into stock market appreciation, the same bank predicts that the Indian stock market will increase in value from US$3.4trn to US$11trn by 2032.
Behind the impressive growth trajectory is a positive policy framework that has shifted from redistribution of wealth towards boosting investment and creating jobs. India has also been a beneficiary of a more suspicious world in which businesses are looking to diversify risks. Apple’s decision to shift 5pc of its iPhone production to India is just one high-profile example.
For India, the broadening of its economic base from services to manufacturing is a kind of reversal of the east Asian model. But it is one that has the potential to raise productivity and deliver a virtuous cycle of cash generation, reinvestment and further growth.
In turn, India’s already large middle class may see its incomes rise quickly. In some ways it feels like a re-run of the China consumption story that caught investors’ imaginations 15 or so years ago. Indeed, India’s GDP is pretty much where China’s was in 2007.
A key difference between India and China is that the former still has attractive demographics. India’s average age is more than a decade lower than China’s.
Another important factor in India’s growth story is how it has focused its investment on building out digital infrastructure. There are now more than 700 million smartphone users in India, twice as many as there were just five years ago. Within a couple of years there will be 900 million Indians connected to the internet.
The benefits are feeding through into attractive corporate earnings growth too. According to Goldman Sachs, earnings are expected to grow by 15pc in both 2023 and 2024. With recession a near certainty on both sides of the Atlantic, and China facing a long haul out of Zero Covid, India is moving out in front.
India’s forecast growth is not just impressive compared with the developed world. It is almost twice as much as forecast for the rest of the Asian region over the next two years. Taking a five-year view, India’s predicted 14pc compound annual growth easily outpaces its neighbours’ 10pc a year estimated expansion , according to Goldman Sachs.
Add it all together and India may well contribute around a fifth of total global economic growth over the next ten years, Morgan Stanley says. That is bound to make investors sit up and take notice.
Sadly, if you were beginning to think you had stumbled on investment’s best-kept secret, they already have. The problem with the Indian investment story is that it is well known. And getting a slice of the action is as high today as it has ever been.
On average, the companies in the Nifty index will cost you 22 times this year’s expected earnings. That is roughly what you were paying for the S&P 500 at the beginning of the year before Jerome Powell’s Fed took a sledgehammer to the US benchmark.
India’s valuation is around 30pc higher than its long-term average of 16 .7 times earnings since 2004. Only 15pc of the time during the past decade has the multiple been higher.
It is not just expensive compared to its own history. It is also the most expensive market in the Asia region. It trades at an 80pc premium to the others, and while it usually does cost more than its regional peers, this is about two and a half times the average. Indian shares also look expensive versus bonds.
In part the higher valuation is justified by higher expected growth. But even factoring in this fundamental advantage, India is more expensive than Korea, China, Taiwan, the Philippines, Singapore and Indonesia.
In the short term, it is hard to believe India won’t pause for breath for a couple of reasons. First, as China re-opens from its extended Zero Covid hibernation, a lot of the momentum-chasing money in Asia is likely to pack its bags and head east. Secondly, as markets start to look beyond next year’s recession, the more economically sensitive north Asian markets could look more interesting.
Unfortunately, for investors attracted by the Indian growth story, the market has always looked expensive. Today it looks excessively so. But that could have been said at many times during the past 20 years. Potentially, the best approach with a market like India is to grit your teeth and drip feed your money in over time.
Tom Stevenson is an investment director at Fidelity International. The views are his own.
