Eh. We didn’t expect it: India has quietly become a remarkable emerging market over the past decade. Not only did it easily post the best performance of any major emerging market, but it was also pretty much the only one to generate positive returns.
If you already knew that, congratulations! You’re either an emerging equity manager or more knowledgeable than FTAV (maybe not the biggest hurdle to jump, but let’s not dwell on that).
Here are some of the respective MSCI indices, rebased as of December 3, 2012.
That Indian equities are having a pretty decent 2022 was covered by our senior FT colleague Chris Flood earlier today, at least in part on bets that India could win on ‘stock shoration’. ‘friends’ of Western manufacturing centers.
But the long-term outperformance (relative to other major emerging markets, at least) flies in the face of conventional wisdom. India’s stock market has a reputation for being an eternal fire of garbage, its economy is known as a stubborn underperformer, and its status as “the world’s largest democracy” comes with heavy and very messy political involvement.
It’s unfair, Morgan Stanley’s Ridham Desai argues in a report that landed in our inbox on Sunday (highlighted below):
India is on its way to becoming the third largest economy and stock exchange in the world, with a GDP of over US$7.5 trillion and a market capitalization of US$10 trillion. It is poised to generate around a fifth of global growth over the next decade. Many investors view India as a market that fails expectations, but we view it as a quintessential self-help story. The fact is that over the last 5, 10, 15, 20 and 25 years, India’s growth has only lagged behind that of China among major economies, and we believe that India can continue to outperform. It is one of the few countries in the world that benefits from the disruptive global trends of demographics, digitalization, decarbonization and de-globalization. More importantly for investors, the MSCI India ranks among the top ten MSCI indices of countries in US dollars over all these periods – a position shared only by the United States and Denmark.
Morgan Stanley admits ‘things could go wrong’, such as a global recession hitting India hard, disorderly domestic politics, policy mistakes, skilled labor shortages and energy price spikes .
But the bank still estimates India’s GDP per capita will more than double to $5,242 by 2031, with the number of middle-class households rising to 165 million and wealthy households quintupling to 25 million. Morgan Stanley believes that “the New India” benefits from three main factors:
First, India is likely to increase its share of world exports, thanks to an increase relocation: The pandemic has only enhanced India’s attractiveness as an office in the world as CEOs have become more familiar with working from home. New developments are also allowing India to gain ground as a factory for the world. They include the government incentives and trends that underlie Morgan Stanley’s multipolar world thesis.
Second, India is pursuing a distinct model of digitizing its economy, supported by a utility called IndiaStack: Operating at population scale, IndiaStack is a transaction-driven, low-cost, high-volume, small-scale system with built-in lending. The digital revolution has already changed the way India manages documents, invests and makes payments, and it is now poised to transform the way it lends, spends and insures. With private credit at just 57% of GDP, a credit boom is in sight.
Third, India’s energy consumption and energy sources are changing in a disruptive way, with vast economic benefits: With improved access to energy, per capita energy consumption is expected to increase by 60% to around 1,450 watts per day over the next decade, according to our estimates, with two-thirds of the additional supply coming from from renewable sources. We believe this change will benefit India’s terms of trade, trigger around three-quarters of a trillion dollars of energy investment, and ultimately reduce volatility in headline inflation as the share of imported energy in GDP will decline.
The problem is that the link between GDP growth and stock market returns is obscure at best.
Otherwise, Chinese equities would have been a global mover over the past decade, rather than actually destroying value over that time. In fact, the MSCI China index is now lower than it has been since its creation in 1994, despite a GDP that has increased almost tenfold over this period.
And the current burst of optimism around “New India” reeks strongly of the “Brazil takes flight” hype. La Bovespa has shrunk by about half since that infamous Economist cover. Beware of Morgan Stanley.