The many forces fueling India’s stock market boom

Thomas Mucha, Geopolitical Strategist
Niraj Bhagwat, Equity Portfolio Manager
2024-04-19T07:00:00-04:00  | S3:E4  | 26:43

The views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.

Episode notes

Thanks to powerful corporate, political, social, and demographic tailwinds, India’s market has been firing on all cylinders. Ahead of the 2024 national elections, equity portfolio manager Niraj Bhagwat gives an inside look at these drivers and the impressive changes he is seeing across the country.

2:00 Observations from recent trip to India
4:35 Strong corporate execution in India
6:35 Reasons for broad-based market rally
10:10 Navigating India’s high valuations
12:00 Macro drivers, domestic politics, and national elections
15:50 Geopolitical risks and opportunities for India
21:45 Assessing the market impacts of climate change
23:35 Niraj’s expectations for the next five years


BHAGWAT: Despite higher valuations, India has done well. And I think the reason is very clear that India’s ability to drive higher return on capital accompanies sectors at higher earnings growth. And what today’s market is saying essentially is that there’s clear visibility about the growth of earnings in the future.

MUCHA: India is a country of big numbers and big contrasts. Home to 1.4 billion people, it’s the world’s fifth largest economy and one of the fastest-growing at more than 7 percent a year. Income disparity is also big. With the 10 richest individuals accounting for more than 10 percent of India’s GDP. And while 68 percent of the population lives on less than $2 a day, rapid economic progress has lifted nearly 135 million people out of poverty just in the last five years. India is very big geopolitically speaking, playing an increasing role in US-China great-power competition in particular. Now India’s stock market, which has risen more than 13 percent a year in US-dollar terms over the past three years, is now the fourth largest in the world. Joining me today to talk about India’s big numbers and investment opportunities is Niraj Bhagwat. A Wellington portfolio manager based in Singapore. Niraj joined us last season to discuss the broader Asian markets. Today we’re here to talk all things India. Niraj, welcome back to WellSaid.

BHAGWAT: Hi, Thomas, and it’s great to be back. Thank you.

MUCHA: So Niraj, you just returned from a research trip to India. So tell us. Where did you go? What changes impressed you the most since your last visit?

BHAGWAT: Yeah. So me and my team, we spent about two weeks. One week was in Mumbai. We actually took some clients of ours along with us. And one week, we did do this annual road trip. So going outside of interiors, and we did that in the interiors of the state of Maharashtra, which is the city is Mumbai, but we’re going outside. And across those two weeks we met listed company managements. We met lot of small businesses unlisted. Met farmers, students, met politicians. So it’s quite a trip. I would say three things that really struck me, and kind of different from the last time. Firstly, this is so pervasive, it doesn’t matter who we met, everybody had a positive sentiment about the future. Really have a strong confidence about the future. You could see economic sentiment and growth really percolating to smaller towns, which is very good to see. And a general feeling among almost everybody that politically stability will be here for the future and they can really look forward. The second thing which I was really impressed with is the infrastructure, and of late India is really big on building infrastructure. And major infrastructure projects are really happening. So we were lucky to be on the coastal road in Mumbai, which is not even open yet, by the way, but we were lucky to see it and it’s a road which is connecting the south of Mumbai to north and cutting down distances by half. I went on the longest sea bridge in India, which is just recently opened, again, connecting one part of Mumbai to another. And while going in the interiors of the country I went on this big highway which connects Mumbai to another big city in the middle of the country, Nagpur. And frankly, I’ve never seen such a highway in India. It’s almost comparable to almost any large road of the great infrastructure project in the anywhere in the world. And the third thing which is quite remarkable which I’ve never seen in India before, and we do this a lot. We meet a lot of students. So we met these MBA students and, what is remarkable was these guys were — they were just about to pass out and they’d all got good offers from companies. They all wanted to be entrepreneurs, every single one of them. And hardly any one of them had family businesses to inherit. And all of them hail from middle class. And that was such a remarkable... I’d never seen this before, that 100 percent wanted to be entrepreneurs. And such a big difference from my road trip in China late last year, where everybody wanted stability and wanted a government job. And I thought that is remarkable because you know that in any country where the youth look forward to their future with great confidence, that bodes well for the country.

MUCHA: So I’m glad to hear you mention the infrastructure situation in Mumbai. I’ve spent too many hours of my life in the back of a cab in Mumbai. So glad to see that’s moving in a positive direction. And it is interesting that, India’s ability to dive into these massive projects, that’s pretty striking, given how hard the country seems to navigate, at least to outsiders. So in your mind, Niraj, what is it about India right now that’s producing such great companies?

BHAGWAT: I think you should take a step back. So if you think about historically India like you remember your cab ride, India found it difficult to execute infrastructure projects. And for a long time India has always been a place where there’ve been a lot of business-minded people, capitalist, really, thinking. And in the environment where there was high cost of capital and a high cost of doing business in general, where businesses had to be having a great competitive edge and generate high returns to be in business. And that really created great returns for shareholders like you and me. And created great companies. We obviously know the Indian IT services story which has been successful. But another fact I’ll give you is that despite having a per capita income of $2,500, India boasts of some of the largest banks in the world by market cap. India has I think the second largest or maybe the largest motorcycle manufacturer in the world, which has large market shares in global south markets. And I can go on with these examples. So that’s been the history, but I think like some of this ability to execute infrastructure projects is changing. So you take the coastal road I talked about, for example. It was in the planning stage for 30 years, and finally the government got its act together and now in the last six years it’s being built and last six years despite COVID interruption. You take something like digital infrastructure, which is very important and there’s been a tremendous leaps-and-bounds improvements in financial inclusion. And all that has happened in just one decade.

MUCHA: Yeah, so the focus on infrastructure is a multidimensional aspect here.

BHAGWAT: That’s right.

MUCHA: So let’s translate some of this dynamic into market performance, and one of the things that strikes me about India, Niraj, is unlike the US, where recent gains are mainly due to the seven largest tech stocks, India’s market rally appears to be more broad-based. What do you make of that?

BHAGWAT: If you look at the heart of it, India is really a simple story of a low-income emerging market going up the development chain. There are 100 million people which are rich people or the upper middle class, consuming the discretionary items which we all know. There’s a large group of 200 million people, the middle class, which is aspirational demand. And then a large group of 1 billion plus, let’s say, of people who are lower-income or poor who offer great growth opportunities even at the most basic level, the basic needs and staples. So it really offers growth opportunities across sectors. And what has happened in the last 10 years is that access to capital for smaller businesses and start-ups has really improved so, for example, India is I think the third-largest start-up ecosystem in the world already. Last thing I will say is that something unique about the breadth of companies on offer for investors. So just like any other emerging market, India has a lot of family-run companies. India has obviously government-owned companies. Increasingly, they are more and more professionally run than owned companies. Because of some historical reason, India has a large collection of multinational subsidiaries which are listed in India. And that’s why the whole growth in markets has been broad-based. And let me give you a stat. So in the last I think five years, the growth in MSCI India has been 16 percent, compounded, and the rise in small caps has been 22 percent. And you talk about the concentration in the US; you look at concentration in India. In the last five years, if you take the share of the top 10 companies in market cap, has gone down from like 35 percent in five years to 26 percent. It’s gone down.

MUCHA: Yeah, that’s quite a contrast there. Well, obviously no conversation about India can ignore the size factor. India is of course the world’s largest democracy. I mentioned 1.4 billion people in my intro. And I’ve heard you say and other people say that there’s been a steady increase in household investing in India. What effect is that having on the market?

BHAGWAT: Yeah, that has been a really great tailwind. I think two things have happened. First of all, as you know and we know, that India is a very young market; half the population is below the age of 30. Now what that means is the fast-changing thinking in the way people invest. I mean historically, me and my father’s generation used to heavily invest in physical assets, gold, real estate. And the younger generation is much more willing to look at financial products. So that’s one big change that is happening increasingly. The second thing which has happened because of liberalization, more and more new entrants have happened in the mutual fund market, the insurance market. And because of the last two decades, a lot of education has gone into this market the people now understand these products and penetration has happened. So if you think about 30 years ago when I started my career, foreigners or foreign inflows into Indian market mattered a lot. And that’s what drove the markets. Now I think critical in the last few years, foreign inflows in India have actually been slack or maybe until recently negative. And despite that, the market has had a strong tailwind and it’s all been local savings and I calculate that almost $20 billion of annual inflows comes from these domestic savings of mutual funds and pensions and insurance.

MUCHA: Interesting. Well, that level of demand also raises some questions about valuations. Many successful Indian companies are trading at very high multiples. And yet, even so, the market has outperformed the US, Europe, Japan over the past three years. So Niraj, you’re an active manager. What’s your strategy for navigating, let’s say, this expensive, go-go market?

BHAGWAT: Yeah, so Thomas, you’re right that valuations at absolute level are high compared to other markets. And probably slightly higher than India’s historical average. But despite higher valuations, India has done well. And I think the reason is very clear that India’s ability to drive higher return on capital accompanies sectors at higher earnings growth. And what today’s market is saying essentially is that there’s clear visibility about the growth of earnings in the future. And if you take a step back, I can’t think of any large market which has a large growth in front of it, young demographics, just a growth potential and more importantly a functional democracy. There aren’t many markets like that in the world. And so that’s incredible. Now what I also think trying to put this whole thing into perspective, and I try to see where the corporate profitability is, and India’s corporate profitability today is lower because the economic cycle changing versus the past. And so I think another way to look at India’s valuations is market cap per GDP. And India’s market cap per GDP today is lower than India’s past peaks. It’s much, much lower, of course, than the US. No comparison. I’ll give you another stat of India’s market cap. So India’s total market cap today I think is the same level as Nvidia and Apple. Again, the top seven. Just these two companies. It’s substantial potential. But I think the way I think of as the bottom-up investor is just all these things don’t matter to me. What matters to me is really trying to find the businesses which can really compound capital for my clients.

MUCHA: Well, of course, these dynamics are happening within a broader macro context, and I do want to shift our discussion here a bit to some of India’s macro drivers. Some are risks, some are benefits. You mentioned before the value of good governance. We do have national elections coming up soon. And it’s my experience that election cycles tend to create uncertainty, and therefore potentially more market volatility. How do you think about that and what should investors be watching as we move closer to an election cycle in India?

BHAGWAT: Yes, Thomas, so, national elections have been announced and results will come out on the 4th of June. And there’s general widespread belief and expectations that the current government will come back. And there’ll be stability and continuing policies. I think there’s a famous saying that a week is a long time in politics and here we’re talking about two months. So I think it’s a fair thing to say that there’s a risk. But I’ll go back to India’s history and give you another example of what happened. So then in 2004, there was a similar thing like today where India was entering an economic up-cycle just like today, and there was a government which was, at least the stock market expected it to come back. And it did. And on day one the market really collapsed. Now, if you would have bought the market on that day or kept your holdings, then within six months or less, than that you more than made it up. So at the heart of it, India has always been a very bottom-up story and does well despite the government. And the second thing which actually enthuses me for the longer term is on my recent road trip I saw that as well, where I met a lot of politicians, and I was very encouraged to see that across political parties the focus is a lot more on jobs, on economy, on infrastructure creation, rather than historically what I used to hear: pandering to identity politics or freebies. So that’s really encouraging in the longer term.

MUCHA: So part of the evolution of India across the board.

BHAGWAT: Exactly.

MUCHA: So Niraj, one of the criticisms of the Modi administration has been a perception of democratic backsliding. I’m wondering if you agree with that and whether you believe that might lead to more social instability that you’ll have to manage as a portfolio manager.

BHAGWAT: It’s a great question because I think, like you correctly identified, if India’s basic structural democracy changes that obviously that changes the complete reason for investing. I think I would, rather than give you my view or I think, let’s start with some facts. The fact that people can talk about democracy backsliding and protest about it in India tells you that there’s democracy. There are many countries as we know across the world where you can’t do that. You can’t protest about democracy backsliding at all in the same country. So that’s the first thing I look. The second thing I think is that India’s institutions, whether you look at traditional institutions or across the board, have been pretty robust and have gone through many challenges and that’s what keeps me very optimistic. Irrespective of which political party is doing what. If you look back in India’s history, in 1970s as you know one of the governments, they scrapped the election. They announced emergency powers. And basically, they arrested all the political opposition and put them into jail. And the media was arrested, everything was arrested. So no comparison to today. Even during that time there were instances of courts ruling against the existing government, and eventually the government having to resign and announce elections. So I think India could go through that, where all democratic institutions were completely challenged and thrown out, and yet India managed to come out of that within two, three years. Unlike many other countries which succumbed to those challenges and never went back, I think I’m pretty confident that irrespective of what happens in the future, so long as the institutions are strong enough, which India has done for 70 years, I think India will be okay.

MUCHA: Well, Niraj, you know that I pay a lot of attention to Indian geopolitics and how India fits into, of course, US-China great power competition. In my view, it’s one of the most important players over the next decade or so in this rivalry between the US and China. India is part of the Quad. It’s growing closer to the United States in strategic sectors and other core areas that have a great-power dynamic here. I’m curious though, as an investor, how do you assess the advantages that accrue to India for, let’s say, not being China?

BHAGWAT: At the basic level the India story today is about a normal economic up-cycle which has now been further boosted by a strong government with changing infrastructure and all the good things we talked about. Of course, there is no question that given what’s happening with the environment with China and the supply chains being shifted, the China plus one policy, India will benefit to some extent. A glaring example of that is Apple, which has publicly announced that they’re moving some of the supply chain. So India is benefiting some of that. And I saw that in my road trip as well. I went to some of the smaller towns, and I met a very small gear maker. And they were starting to supply to some of the big industrial names that we know in Europe. And the mandate from them from their customers was, look, we want to change our supply chain to India. And so just if you can keep producing, we’ll give you more orders. So that’s positive. I think that’s also helping is the current government’s policies of production-linked incentive scheme. And India is obviously offering one of the lowest corporate tax rates in the world, so new investment gets 15 percent corporate tax rate, so that’s making attractive for the change as well. The second thing I think, Thomas, about how investors like me or more broadly should think about this environment is that India becomes even more attractive because, what India offers is investing in a country which is open to foreigners, where English language is widespread, prevalent. But more importantly it’s a thriving democracy. And a stable and legal framework which is very important to investors.

MUCHA: There’s no doubt that India is sitting in a tough neighborhood. Pakistan on one side, China, India’s long-time rival to the north. Both adversaries are nuclear capable. So how does that shape your research and investment approach? I mean how do you fit these very difficult, complex geopolitical challenges into your framework?

BHAGWAT: It’s a real risk, this geopolitical risk of the neighbors for the longer-term India story. But I think it’s important to also think about couple of changes that have happened for India. India has moved much closer to the US. Strategically from a defense perspective. And if you look at India’s military purchase, defense purchases, India is almost entirely buying from countries in the West. Secondly, India is heavily modernizing its own military and investing in its own defense. So I think, yes, the risks are there but to some extent because of these two things I think those risks are mitigated. More importantly as a bottom-up investor, that creates opportunities as well. So, again when I started my career, there were no opportunities to invest in the defense sector, now we have a very growing and thriving defense sector to invest in. And I expect that in the next decade or so, this will be probably the fastest-growing sector for investors to focus on. When I look at the evolution of the US economy, US definitely benefited from the strong growth in the industrial-military complex. I think there’s a quite a reasonable chance that India also benefits from that as well.

MUCHA: Yeah, China is doing the same thing. Many countries around the world are attempting to do that. I agree with your assumption there about the importance of defense. As India is a member of the Quad, it has to normalize its defense relationships with the other Quad members: Japan, Australia, and the United States, of course. So that trend is very interesting to me as well. I’m curious though, how are you thinking about India’s relations with Russia, which has been a sore spot in a lot of the conversations that I have with national security policy makers. As a member of the BRICs; China and Russia in particular are trying to use the BRICs as sort of an alternative institutional framework to push back on the US-led international system. So how does that fit in?

BHAGWAT: Yeah, so I think India will always chart its own real policy and try to maintain its identity. So India will try to be a friend to everybody and that will not change. I think India’s relationship with Russia here to go back and visit history, and you know this, India was very close to the Soviet Union during the Cold War. And because of the historical reasons when US was closer to Pakistan which is obviously supplying defense to Pakistan, India had to buy weapons from Russia. So even when the Russia-Ukraine War happened, India had almost 80 to 90 percent of its military equipment having been bought from Russia and entirely dependent from spares and service from Russia. So it was not a relationship which, even if India wanted, could break. But more importantly I think as India has demonstrated in the last year or two, India has been able to navigate this difficult set of relationships. And frankly even in the Israel Middle East war, where India has been able to have working relationships and probably deeper relationships with both sides of the parties to India’s benefit. And I think there’s no better glaring example of India buying Russian oil, refining it, and selling it to the Europeans. And India actually benefiting and, who would have thought? I wouldn’t have told you this would have happened. So one, I think what you should expect from India is trying to be closer to the West than before, but always having an independent policy. And trying to navigate both sides.

MUCHA: Sure, every country has its own interests. And I agree with you. I think as India’s power increases, its role is going to increase, not only regionally but globally and geopolitically. So it’s going to be a key variable to monitor as part of the investment backdrop. Another key variable here, and something that listeners of this podcast will know, is climate change. India of course sits in a very challenging position with regard to climate change. The physical risks of heat, rainfall variability, rainfall extremes, water scarcity, typhoons, all of these things are dangerous, all of these things are expensive. At the same time, of course, India is racing to decarbonize. It’s racing to reduce its dependence on coal. So how do these challenges, these long-term structural climate challenges shape your view? Both with regard to India’s macro potential and then the company-specific issues?

BHAGWAT: Yeah, Thomas, it’s a real thing to face, but I think as an investor, this is an issue for to be discussed over years and decades and not over months and quarters. We also have to ask, what is India doing about it. And like you correctly said, the government is behind trying to change. So there’s been massive incentives for implementing solar, wind, and other renewable energies. They just announced incentives for electric vehicle companies to come in and invest in India. And electric vehicles to be put up to the whole infrastructure. So you will see more and more of that. And I think if I’m not wrong, India is one of the few large countries which has met its COP26 requirements. Also from a company perspective, at least all the companies we invest in, almost every company is focused on trying to see how they can reduce the carbon footprint, how can they reduce their water usage. Many of these large companies have net-zero targets which are faster or better than India and many of the global peer. Like for example, did you know that some of the large cement companies in India have already a better carbon footprint than some of the global majors in cement? As an investor, this risk is real; we look at it when we invest in companies. But I think there’s opportunities as well.

MUCHA: So Niraj, let’s wrap up our discussion here. Obviously, you’re bullish on India yet clear-eyed about the many risks. So what are you hoping to see from India over the next, let’s say, five years?

BHAGWAT: So firstly, I would expect a stable government. And continuity of policies which is very important for this, positivity to continue. The second thing I would expect is reforms in agriculture sector. And we didn’t discuss this but that’s another risk of some problem area India needs to solve. A large amount of population is reliant on it. We just talked about climate change, and I suspect that any climate change will affect these people the most. So I expect some real positive policy which will be good for India. The third thing I think I expect is that with increasing infrastructure and better infrastructure, the manufacturing share of GDP will go up. Which obviously has implications for global supply chains, but for India’s progress as well. Lastly, and big picture, I think India will be on everybody’s mind. That’s what I think. If you think about India today and if you said at the start, India is the fifth-largest economy in the world, by the end of the decade or earlier India will be the third-largest economy in the world and yet today the India share of, MSCI global index is I think 1.7 percent or something. So I think you will see a lot more focus on India. India will be on everybody’s mind. And I think a lot more inflows int the Indian market.

MUCHA: Niraj, we could go on for two, three, four hours on a topic that’s so rich and complex and fascinating.

BHAGWAT: We have to come back, you have to invite me back.

MUCHA: I’m going to invite you back. But for now, let’s wrap it up here. Thanks so much, Niraj, Bhagwat, an equity portfolio manager based in Singapore. Thanks for coming back to WellSaid.

BHAGWAT: Thank you, Thomas, always a pleasure.

  1. “India’s economic growth in Q3 of FY 24 beats expectations,”

  2. “India’s 10 richest people control a fortune woth 11% of the country’s GDP,” Startups

  3. “68% of Indians still earn less than $2/day and about 30% earn less than $1 day,” Business Today online.

  4. “One tenth of India’s population escaped poverty in 5 years – government report,”

  5. “India’s stock market expected to reach US$10 trillion market value by 2030,” India Briefing online.

  6. MSCI and National Stock Exchange of India, figures as of 31 March 2024.

  7. MSCI, as of 31 March 2024.

  8. Bloomberg. As of 31 March 2024, India’s total market cap: $4.7T; Nvidia: $2.2T; Apple: $2.7T.

Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk. Podcast produced April 2024.
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