Economy and growth jigsaw on Indian flag

India takes centre stage

By Rashi Talwar Bhatia, Gustavo Medeiros

Rashi Talwar Bhatia, Portfolio Manager for India Equity, and Gustavo Medeiros, Ashmore’s Global Head of Research discuss the opportunities present in the India Equity universe and their outlook for the second half of 2023 and beyond. 

The discussion covers their views on topics such as:

  • The drivers behind India equity’s significant outperformance; structural or cyclical?
  • India’s role as diversifier for asset allocators in a multipolar world
  • The advantages of investing ‘All Cap’ & stock idiosyncratic
  • The most common investment challenges
  • Our highest conviction ideas

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Transcript is available below.


Ted Smith: Welcome, and thank you for joining Ashmore's webinar titled 'India Takes Centre Stage'. My name is Ted Smith, and I'm a member of Ashmore's Institutional Business Development team based in New York.

Today's webinar is for investment professionals only and not for members of the media. The webinar is targeted for 30 minutes. Any questions we're not able to answer live, we'll try to respond to you directly after the webinar.

Today's speakers are Rashi Talwar and Gustavo Medeiros. Rashi is Head of Ashmore's India office and the lead Portfolio Manager of our India strategy. Gustavo is Ashmore's Global Head of Research, based in London. Rashi and Gustavo, thank you for your time today. To all attending, thank you for joining today's webinar. If you have additional questions, and you would like any follow-up information, please contact your Ashmore representative. We'll be sending out a follow-up email with a webinar replay for your convenience. Feel free to share this with your colleagues or others who might find it valuable.

So back to our discussion for today. We'll cover a few things, the drivers behind Indian  equities' significant outperformance, India's role as a diversifier for asset allocators, the advantages of investing across the market spectrum in India, the most common investment challenges we see in India, and some high-conviction ideas we see today. So with that, I'll turn it over to Gustavo and Rashi.


Gustavo Medeiros: Thank you, Ted. I'm just going to highlight a few relevant macro top-down points before starting the discussion with Rashi.

In our view, India is a remarkable investment destination from a top-down perspective. There are three elements worth highlighting: India’s higher than average gross domestic product (GDP) growth compared to Emerging Market (EM) and Developed Market (DM)  economies, the significant increase in manufacturing investment that we've been seeing over the last quarters, and India's unique geopolitical position.

In terms of GDP growth, India is likely to outperform China and other large countries for the foreseeable future, in our view. India's growth is anchored by one of the most favourable demographic profiles in the world. For example, India's population has recently overtaken China's, and therefore its age dependency ratio is likely to be improving significantly over the next decade, which is different than most other countries.

Second is also the recent large investment in manufacturing taking place in India. From an investment perspective, it's interesting that multi-national companies have been investing in India for a while now, but it's mostly been in lower value-add IT services and call centres. But recently, India has increasingly become a case of foreign investment and local investment focused on manufacturing. Manufacturing investment tends to be much more transformative than services, with much larger multiplier effect in the economy in terms of productivity gains. And the more complex the products that are being manufactured, the higher the multiplier effect.

In that sense, Apple's announcement that India will become a key hub for manufacturing is very interesting and worth monitoring. It also that explains why India's GDP growth continues to surprise to the upside, despite the fact that we've seen a significant slowdown across most large economies in the world over the last couple of quarters.

And in terms of geopolitics, despite its historical differences and clashes with both the US and China, India’s Prime Minister Modi has been pretty effective at threading the needle of allowing India to get closer to the United States (US), particularly US companies that have been looking at India as a place for global manufacturing, but has also been doing a good job transacting with the rest of the world. Modi also managed to criticise Russia's invasion of Ukraine pretty forcefully while at the same time taking a neutral stance on the conflict and therefore benefiting from potential trade advantages.

As India's economy expands, we think that India will become an increasingly important player on the geopolitical space. And in September, India is hosting the G20 meeting, which is going to be an important turning point, potentially, in our view, worth noticing.

Key is going to be India’s ability to remain a neutral player, avoiding potential kinetic conflicts and pursuing its own economic interests, despite its differences and also remaining an important place to maintain a balance of power in Asia that is not accessibly concentrated in China. This is where India’s unique power lies.

Now turning to Indian equities and to you, Rashi, it's very interesting that over the last ten years, MSCI India index has outperformed the MSCI EM index by almost 100%. Over the last three and five years, India has delivered 67% and 44% total return, respectively, which has outperformed both EM and DM, and the MSCI ACWI comprehensively. In your opinion, is that outperformance structural, and how much of that is cyclical?


Rashi Talwar: Well Gus, one of the mbajaain reasons that the Indian economy has been able to absorb some of the recent  global shocks has been from some of the reforms that have been implemented over the last ten years. Those are starting to pay a rich dividend now. For example, the inflation targeting system that the Reserve Bank of India put into place, with an inflation target of 4% with the tolerance band of plus-minus of 2%, and also the Indian government laying down the fiscal consolidation path every year in the budget and then holding itself accountable to that path

Also direct bank transfers and subsidy transfers to the poor, which have been paid direct into India’s banks has essentially eliminated a lot of the leakages in the system we used to have in the past. Also, India’s Goods and Services Tax (GST) has essentially got the huge unorganised sector that we have in India into the formal taxpaying fold. That has given the Indian government a significant amount of tax revenues to utilise during the tougher times.

The bankruptcy act, lower corporate taxes, and labour reforms have definitely helped in ease of business in India. And I think this is truly what has made India’s outperformance more structural in nature, and one that I think has more fundamental legs to it.


Gustavo Medeiros: Very good. Yes, it's interesting to see. A lot of people are talking about the advantages of India becoming a global manufacturing hub, but not a lot of people appreciate how many important structural reforms have been achieved that were thought of as always being difficult to implement. But what do you think of the cyclical picture in terms of economic growth?


Rashi Talwar: So, cyclically, too, we actually are really well positioned. If you look at the Indian corporate and financial sector, they've seen a remarkable turnaround over the last few years. The banking system went through the corporate credit cycle, a really aggressive or bad corporate credit cycle in 2015/16, but since then they came out of it with stronger, healthier balance sheets.

We're now a decade into low no-performing loans (NPLs), leverages and the banks’ balance sheets are well capitalised. They have the ability to lend, and as NPLs are low, they have the ability to take risks. Corporate balance sheets are also extremely de-levered. And with opportunities like you mentioned, the China plus-one policy or the Make-in-India stories that are coming through, corporates have the ability to go out and borrow and build out capital expenditure (capex), and that's what's really important.

In a lot of ways, India is insulated to some degree from the rest of the world. We're a large domestic economy and essentially a relatively closed economy. So if you look at Indian manufacturing purchasing managers’ indices (PMI), we have not seen India take the same hit from the global manufacturing slowdown that the rest of the world has. Our manufacturing PMI for the last 18 months has been in expansionary mode (over 50), whereas most DMs have seen the manufacturing PMI go under 50. Also slower growth essentially means lower commodity prices, which is extremely good for India. We're a net energy importer, and we import most of our precious metals, so slower commodities is a significant tailwind to our economy. I mean, with GDP estimates of around 6%-6.5% for the current financial year, India does stand out.


Gustavo Medeiros: Very good. Yes, I definitely agree. And I like how you hedged the bet that even if you get slow growth, that's going to be positive for the terms of trade in India. But this is a very fair point that not a lot of people appreciate. India seems to be in a sweet spot because Indian domestic growth keeps on surprising to the upside, whereas global growth slowing down actually benefits India in terms of the trade channel as well. So there's a double positive that is helping the country significantly.

Now, as we mentioned, India's going to be a very important country in geopolitical terms of space, and a key theme of ours is that we are in a multi-polar world. And again, India’s place within the balance of power within Asia, is precisely why the West has a huge amount of interest. For example, just a few months again the Australian prime minister received Narendra Modi in a huge, crowded stage in Australia.

Modi had a massive ovation, and the Australian prime minister compared his appearance with Bruce Springsteen. He's incredibly popular. And India has the potential to expand its soft power given its very large immigration base. That's going to become even more important over the next decade as the Indian economy outperforms. So with that in the background, do you think investors should rethink their allocations to India? Is a standalone allocation to India on top of the broad EM equity exposure warranted here?


Rashi Talwar: Emerging markets now make up 59% of global GDP, it used to be 45% two decades ago. I believe this shift will continue in favour of EMs for the foreseeable future. I also believe it is extremely hard to contain the emerging market countries into one acronym. Brazil, Russia, India, China, each of them have their own strengths, weaknesses, independent policies, and independent place in the new geopolitical world order. Therefore putting them together does not do justice to any of them.

Emerging market indices tend to be very large-cap focused, and I get it. It's easier for global asset allocators and broader EM allocators, given the modest weighting that EM has in the total pool versus the large scope of countries that they have to cover. But what happens is that these indices then focus on only the large well-researched and well-known companies, or, you know, the US-listed American Depository Receipts (ADRs), which is also just a handful.

Single-country mandates have a lot more flexibility. They have the flexibility to invest in the small and the mid-cap space, which actually helps in generating more alpha. Just to give you some idea of the size of the opportunity, In India, we have over 1,000 stocks which are of a market cap of over $100 million and actively investible. I'm not talking about the really thinly traded ones, but the actively investible ones.

On average we add 100 new stocks every year, and these are in widely diversified sectors, such as domestically-focused financials, consumer staples, discretionary, real estate, infrastructure. And on the export side, we have the pharmaceutical sector, India’s famous IT tech sector, and chemicals, which has come up pretty recently. So India is not beholden to a single market driver. It's a very diverse market, and there is a significant amount of alpha that can be generated from outside the large caps, in the mid and smaller names and across various sectors.

If you look at the global landscape, India makes up 7% of global GDP. But if we look at the MSCI Global index, India is less than 2% of the index. It has grown over time, and I think it will continue to grow, because the growth dynamics are so much in favour of India that even the index will naturally start to recognise that. So, I definitely believe there is a case for a single country allocation to India possibly on top of a global allocation or an EM allocation. But I believe a serious case can be made for single-country allocations to countries like India and Indonesia, and I think now is the time.


Gustavo Medeiros: Very good. It's a very compelling case for sure, that countries with higher potential GDP growth and much better fundamentals, like India and Indonesia perhaps should be considered. I've heard several portfolio managers, including you, calling India a stock picker’s haven given how deep and broad the asset class is. Now, every investment in one specific country carries risks. So what are the main challenges one should keep in mind when looking to invest in India?


Rashi Talwar: Yes, India doesn't come without its challenges. You're absolutely right. We have always traded at a premium to most emerging markets, and given the structural and cyclical tailwinds that we just discussed, I don't see valuations becoming less punchy any time soon.

If you look at India versus China, India has been in favour over China for most of the last 24 months. If we start to see some kind of revival in China, with its market bouncing back, and we see many global or EM-based allocators moving position from India to China, you could see the Indian market sell-off a bit, some volatility or underperform the emerging market.

We did see that in the first quarter of the calendar year. But these things tend to be transitory.

We also cannot run away from the fact that India is headed into a general election in the next 12 months. I think any challenge to the incumbent party coming back would create some volatility in the market as well. India, as always, has a lot of other information challenges, whether it's promoter groups, family-ownership structures, and with just how things work on the ground. That's pretty common with most South Asian countries and it’s a part of investing in India as well. But therein lies the opportunity in that adversity, for stock pickers to actually be able to pick attractive stocks over a period of time.


Gustavo Medeiros: Very good. Well, talking about stock picking, how do we do things differently at Ashmore Mumbai, and how does our investment style stand out?


Rashi Talwar: So, Gus, most of the India managers tend to be growth managers, but we do things a little differently. We have distilled our investment philosophy what we call the intrinsic value framework. Listed companies during their life cycle go through various ups and downs, which could be due to external factors, internal events, a short-term negative outlook, or for multiple factor reasons. But we like to buy good-quality businesses, essentially when their stock price is trading at a significant discount to their intrinsic value. We believe such opportunities do come, and we have to know our companies really well so when these opportunities do come along, we have the ability to act on it.

I'll give you an example. One of best run financial companies in India is Bajaj Finance. It has traded at premium valuations for most of its listed life over the last five or ten years. During COVID-19, the stock corrected significantly, and it was trading at really attractive valuations compared to its three-year, five-year, ten-year history.

We have followed Bajaj Finance fairly aggressively over the last ten years or so. We meet the management regularly. We understand their processes, their business, how they've built their loan book. And we were fairly confident that the company would come out of the COVID-19 pandemic stronger than before and stronger than others in the financial space. So at that point of time, we built a position at the peak of the pandemic in Bajaj Finance. A few months later, India went into the fintech craze, and valuations reverted to stratospheric levels, so we sold, made a handsome profit, and we got out.

The other side of the investment thesis that we follow is also a very strong sell discipline. When we see stocks are trading well above their intrinsic value, we do not hesitate to book profits and exit the stock. We will then wait patiently again. People ask "Will these opportunities come again and again?" And surprisingly in the last two decades, they do. Even for a stock like Bajaj Finance. We have bought and sold the stock at least three times over the last decade. So you get these opportunities, but you have to be patient, you have to be persistent, and you have to be consistent.

We are not growth managers. We are not value either. We will invest across the style, but if you look at our risk-return profile, it comes up as ‘stock idiosyncratic’, which is exactly what we are. We are a bottom-up stock picker, and that is what we do differently.


Gustavo Medeiros: Very good. Yes, it's interesting because India has also another characteristic that we haven't mentioned yet, is that India has quite a lot of retail investors, right? And because India's growth has been very strong, most managers have a bias towards the growth style, perhaps. So there is a bit of a growth and a momentum style that comes together with this profile. It’s interesting to see our approach is different, and it sounds a little bit like we're back focusing on the basics of investing in equities. So what is today getting filtered in our intrinsic value framework? What is the team bullish on given Indian markets are still trading close to all-time highs at the moment?


Rashi Talwar: Yes, you are right. Markets are at all-time highs, or indices are at all-time highs. And it's tougher to find opportunities at markets at all-time highs than at COVID-19 prices, where we saw a lot more mispricing and many more companies were trading below their intrinsic value. But you do find opportunities even now, surprisingly so.

India came out of the COVID-19 pandemic, and as most of the world knows, we had a K-shaped recovery. Urban India came out really strong and bounced back very aggressively, whereas rural India suffered or had a slower recovery, as various factors just hurt more than usual. Government policies and then subsequently a reasonable monsoon with a good crop cycle made us assess that we were going to see rural India come back.

Typically, if you're looking at the rural India recovery, most managers will run towards the consumer staples. So Hindustan Unilever, Nestle, Britannia, all of these stocks trade at 40 or 50 times multiples. But nobody was looking at the two-wheeler manufacturers. These stocks were trading at ex-growth multiples, and have generated free cash flow for years on end, and have an extremely strong return on equity, but were trading at multiples which were way below their historic averages. We went in. We did our work. We've known the companies for a long time, and we realised they were trading significantly below their intrinsic value. So, we decided to build a position in them done during the last few months while the market has been at its highs. So, is it difficult? Yes. Is it doable? Absolutely.


Gustavo Medeiros: Great, very interesting. Yeah, definitely the COVID cycle has been very unusual, and there is a global theme here in the different sectors reacting at different speeds and the different timing presents its own opportunities.

I'm just going to offer a quick wrap-up here before seeing if there are any questions from the audience. It feels like India currently enjoys a sweet spot of structural reforms, positive demographics, and geopolitical dynamics that makes it an attractive and quite unique investment destination. We're seeing more and more global companies talking about India and planning to set up manufacturing bases there, both as a global hub, but also catering to its massive global market that is expanding quite fast. And capex manufacturing is typically a much more powerful force to generate structural GDP growth outperformance, and India in our view is just on early stages of becoming a global manufacturing hub. So that's very interesting from a global top-down perspective.

As you highlighted, Rashi, I think investors ought to be looking at India as an independent allocation on top of either their global equity portfolios or their MSCI EM equity portfolios, given all potential beta and alpha that you have in its market. And our intrinsic value framework that has helped Ashmore India to generate alpha over a long period of time is very interesting and seems to be in a pretty good place to keep on outperforming. So, Ted, are there any questions that are coming from our audience?


Ted Smith: Sure, thank you, Gus, and thank you, Rashi, for those comments. We do have a few questions. First of all, our audience would like to know how safe India might be from an asset allocation perspective if we see a recession in the United States (US).


Rashi Talwar: We have a vibrant export sector, with the US as a large trading partner. There is no running away from that and from the IT services standpoint as well. But you have to recognise that the Indian domestic economy is very large and the Indian consumer continues to be reasonably active. So from that standpoint, I think we will see some impact, but I think the impact will be far more cushioned, given India’s domestic base, our domestic manufacturing, and the domestic consumer. If you look at the current GDP estimates of 6% to 6.5%, these had started higher, and as the chances of US recession  became stronger, these numbers were revised down. So the revisions have already taken place. If you ask me, the Indian IT sector is already factoring in a US recession.


Gustavo Medeiros: I was just going to add, given what Rashi mentioned during the webinar, a US recession would imply lower commodity prices as well. So in terms of trade, it would be positive. But there is also obviously an opportunity here of changing the portfolio more towards domestic growth stories that are much more resilient and insulated. India is very large but still a relatively closed economy by international standards, much more than most of other Asian economies. So I agree with Rashi. I don't like the 'decoupling' word, but I think India definitely would be more insulated, and there is also, again, a very broad market that allows for a portfolio rotation that would provide further insulation against that.


Ted Smith: Thank you, Gus and Rashi. I think you've already mentioned a couple of these, but could you help indicate the key factors an investor should be aware of if they're trying to understand the Indian market better? What are the key macroeconomic factors to look at in the attractiveness of the Indian market?


Gustavo Medeiros: I think I've highlighted the key points that outline the case of investing in India. The potential growth in any economy is a combination of demographics and capex or investment and total factor productivity. And as I mentioned, typically investment in the service sector has a much lower impact on the total factor productivity of the investment in manufacturing. So, the fact of the matter is that India's GDP growth has been extremely biased towards capex already for 10-15 years.

About a third, or more than 30% of India's GDP growth is explained by gross fixed capital formation, which is very, very high for EM standards and for any economic standard.

What is interesting is how that is shifting over the last couple of years towards a sector that tends to generate much higher productivity growth. That's also important to the extent that demographics tends to be a double-edged sword. If you have a very strong demographic but the increase in population is not accompanied by high GDP growth and high opportunities in heavy employment sectors, that could become a challenge in terms of social stability. But I think India has been turning the corner, and is becoming a global manufacturing hub at a very interesting time when India's likely to be getting very close to the peak of its demographic dividend, which is very important.

What Rashi highlighted which is key to monitor is whether or not the current administration remains in place and whether or not the reforms that the current administration have been pushing remain in place as well. So that's very important to monitor, and we're going to be monitoring very closely.

To be fair, it's one of the places that we have the least worry in terms of political risks. It feels very unlikely right now that Mr. Modi's leadership will be challenged at the next general election, and while people monitor the local elections very closely, they’re not typically representative for the general election. But I think that's going to be a key theme and topic to monitor.

Also, in the past, people were monitoring India's external accounts very closely – especially India's import of gold, commodities and energy – was always keeping the current account deficit at a relatively elevated level. That's changed significantly, partially as Rashi mentioned, because central bank reforms allowed for a much better monetary policy conduction and higher interest rates, which brought confidence India’s population could actually use the banking sector and local rates as a source of saving. Also the buoyant local equity market became an attractive destination for local investors. Therefore, there's been much less pent-up demand for gold, and there's been quite a lot of energy diversification.

India has been a massive superpower in renewable energies and has been one of the countries diversifying its energy matrix at the fastest pace. I think all these factors are important to monitor. I think it's unlikely that the old dynamics of India’s poor external account dynamics are unlikely to return, but it's something to monitor. There are several other elements that I could mention, but in the interest of time, Rashi, anything else that you would like to point out?


Rashi Talwar: No, Gus, I think you've said it all. I think that's well put, as to what we should be looking at in India.


Ted Smith: You both touched on this briefly, about the upcoming election. You've both said Modi is very popular and it's likely he'll be re-elected. Rashi, as someone who's on the ground in Mumbai, are there any risks associated with the election from a policy standpoint, for example, that go beyond the election?


Rashi Talwar: Like you said, it seems highly unlikely right now that we will not see Prime Minister Modi return if you look at all the popularity polls. The debate is what is going to be the degree of the win. Well, we're still 12 months away, but it looks pretty straightforward.

But over the last 23 years I've been working here, I've seen both parties at power, and the GST was something both parties wanted to do. I think even if you look at the inflation targeting after 2013, even when Congress Party was in power, they realised the mistake they made, and they course-corrected aggressively just prior to Mr. Modi becoming prime minister. So I think history teaches everyone. We all learn from it, and we all hope not to make the same mistakes. The benefits of the reforms that have been done over the last ten years are visible to both parties. I don't think anybody will want to mess with the economic benefits of what we are seeing currently because that obviously is very powerful from a growth perspective.


Ted Smith: Thank you very much, and thank you, Gustavo and Rashi, for sharing the last 40 minutes with us. I think our audience found it very helpful. We do have other questions and I'll remind our audience members that we will get back to you directly on those. We'll see you with our next webinar update on the emerging markets. Thank you.

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