India Equity - A Bright spot in stormy times

By Goldman Sachs Asset Management

While global economy navigated uncertain markets in an environment of higher real interest rates and with geopolitical risk coming back to center stage – Israel-Hamas war, drawn out Russia-Ukraine conflict and ongoing US-China trade tension, India had a stellar 2023, as a result of strong earnings and bullish growth, putting it in the right track to become the third largest economy by 2030. Strong investment activity bolstered by government’s capex push, buoyant private consumption and emerging mega trends like digitalization, urbanization and shifting supply chains can fuel the country’s growth.

Diversity and Prosper

The frenzy around AI has driven a staggering level of disparity in performance in 2023. Thus, in this new environment, diversification has become a key necessity for investors and can add to the advantages of an India Equity allocation, one of the least correlated asset classes to global equity indices owing to the domestic nature of its economy, and thus, is relatively sheltered from global shocks.

Exhibit 1: India is one of the least correlated markets to broader Emerging Markets (EM) and Developed Markets ⁱⁱ

Domestic consumption and investment accounts for 70% of India’s GDPⁱⁱⁱ. Consumption stories related to Millennials, especially in consumer tech – E-commerce, Gaming, Food-tech, Edu-tech and Fintech space will be a driving force in India’s growth. Relative to other countries like US and China, penetration levels for these services are still low in India and expected to grow over time. India’s middle-class population, one of the largest in the world, is expected to account for 80% of the country’s population and 75% of consumer spending by 2030^iv. As these trends play out, consumer spending is expected to play out across sectors with 2-2.5x spending on apparel, personal care, 3-4x increase in healthcare and entertainment services and a 3-5x increase in consumer durables such as electronics. As these trends continue to play out and are reflected in the Indian stock market, it furthers the need for a standalone allocation to the asset class, which continues to outperform its peers after posting resilient returns in the recent years.

It is also a highly inefficient market, especially within the SMID cap segment, providing active managers adequate opportunities to deliver alpha. Over the last decade, a top-quartile fund manager has generated both higher absolute and relative returns in India as compared to emerging markets and Asia ex-Japan.

India’s sectoral composition is also diverse, with a healthy allocation towards domestically oriented sectors like the consumer, financial and healthcare sectors. It also boasts of superior corporate profitability and entrepreneurship, as indicated by some of the highest returns on equity amongst peers and approximately 1,000 IPOs since 2015.

Digital India

A trend that started in 2015 has now penetrated several sectors benefiting millions through the introduction to digital banking and wallets, reducing inefficiency and corruption that’s usually synonymous with cash transactions. India’s unique biometric system, Aadhaar, which covers 1.3 billion people, has propagated financial inclusion within the country by lowering Know Your Customer (KYC) costs, thereby making it easy to open bank accounts, transfer money and enabling access to banking system to the rural unorganized section of the society. Digital payments such as UPI, Immediate Payment Service (IMPS) and wallets have registered substantial growth and revolutionized the digital payment ecosystem by increasing person-to-person (P2P) and person-to-merchant (P2M) payments. Digital transactions now account for ~76% of GDP in 2023, compared to ~4% in 2016^v

Digitalization has not only helped the financial sector but also improved governance in other sectors including healthcare through indigenously developed applications to monitor caseloads and vaccine status during COVID outbreak, supporting the country’s accelerated recovery from the pandemic. With 52%^vi of the population currently connected to the internet, a number that is projected to grow to 1.5 billion by 2040, the “Digital India” program has re-engineered the country’s socioeconomic schema and could propel it to the forefront of digital and technological innovation in fintech, education, e-commerce and other consumer sectors.

Corporate earnings in 2023: Made in India

Indian earnings are at the cusp of a new growth cycle after a decade of depressed growth. After solid 23% earnings CAGR through FY20-23, Indian corporate profits are pegged to grow 15% in 2024 and another 14% in 2025, broad-based across the sectors. Small- and mid-cap companies are also showing signs of good earnings traction as they recover from high input cost pressure. Meanwhile, signs of private corporate CAPEX seem to be emerging alongside a recovery in housing and infrastructure. Private corporate project loan approvals have seen a significant uptick, with total project approval rising by ~36% YoY. Concurrently, capacity utilization across sectors has trended to a 10-year high, bolstered by a focus on infrastructure and fiscal outlay. We believe the recent recovery to be durable, especially when considering multiple growth drivers of supply chain diversification and production-linked incentives.

Fair(er) Valuations

MSCI India’s valuations have cooled from its 2021 peaks, with NTM P/E trading at 20.5x in-line with its 10-yr average. The premium to the region has also reduced by 38%. While valuations remain slightly on the higher side, we believe the premium is justified by better-than-ever earnings visibility and compelling long-term story. Over the past decade, MSCI India has delivered annualized returns of 10.4% (USD) compared to a modest 2.1% (annualized, USD) by MSCI EM Index^vii. While it might be driven by the industry heavyweights, a closer look at the broader BSE 200 index quickly shows that approximately 40% of the index has delivered 20% annualized returns over the last two decades^{viii ix}.

What lies ahead

India’s structural growth prospects remain intact with GDP growth likely to grow at 6.3% YoY in 2024^xi. The fundamentals are underpinned by – 1) strong macro stability owing to narrowing current account deficit and flexible inflation targeting taking effect, 2) double-digit EPS growth over the next decade, and 3) reliable domestic equity inflows through schemes like Systemic Investment Plans (SIPs). In fact, India is on the path to become a defensive cornerstone within the EM market with its beta to EM down to 0.4, aided by robust domestic equity flows, thereby reducing dependence on FPI equity flows. While foreign investors have been net buyers in Indian equities this year, India’s rising share prices have been primarily driven by domestic flows most of the year. Risks to Indian growth outlook is likely to be well-balanced, with primary domestic risk coming from volatility leading up to the mid-year general elections. Investment growth is expected to re-accelerate post-elections in 2H24, supported by private CAPEX. While repeated supply shocks and geopolitical tension is likely to keep inflation on the higher end of RBI’s target, India is expected to be less vulnerable to global shocks compared to 2022 owing to its improved external balance^xii.

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ⁱ Source: S&P Global estimates, as of Nov-23
ⁱⁱ FactSet; MSCI; Goldman Sachs Global Investment Research (via Goldman Sachs Global Investment Research). As of May 2023.
ⁱⁱⁱ Source: World Bank, May 2022
^iv The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation.
^v Government of India, Nov 2023
^vi Source: Kantar, December 2022
^vii Source: Goldman Sachs Asset Management, as of Nov-23
^viii Source: Goldman Sachs Global investment Research, as of Nov-23
^ix Past performance does not predict future returns and does not guarantee future results, which may vary.
^x Source: Goldman Sachs Global Investment Research, as of September 30, 2023
^xi Source: Goldman Sachs Global investment Research, as of Nov-23
^xii Source: Goldman Sachs Global investment Research, as of Nov-23. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation.

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