India is undergoing a cyclical upswing, with several factors at play including a buoyant property sector that stands in stark contrast to the troubles of Chinese real estate. The banking sector has some of the best balance sheets seen in over a decade while the government continues pursuing infrastructure spending with zeal to support growth. Consumer sentiment is improving from the dark days of COVID; urban demand is robust, and the optimism is gradually spreading out to more rural parts of India.
More broadly, India’s share of global trade is on the rise. Easing restrictions from the government has resulted in higher foreign direct investment flows into the country.
The deep dive
The reality on the ground is equally as encouraging as the upbeat macro picture.
A corporate profit boom is underway. For the July-September results season, profits are up 41% year-on-year and on average earnings are in line with the market’s expectations. In fact, corporate earnings are expected to grow at 20% year-over-year for the full fiscal year, backed by strong company fundamentals.
While the numbers illustrate one half of the picture, the other half comes from anecdotal evidence. India has consistently unveiled pro-growth budgets over the past few years, with a sizeable emphasis on public infrastructure spending. This is a positive trend because infrastructure has been a hurdle to growth before. Take logistics cost as an example – it is significantly higher in India vs. the global average, resulting in painful repercussions for the economy.
“We believe India's logistics are bound to become more efficient and globally competitive over time.”
The Modi government aims to bring down the cost over the next five years by developing industrial corridors between major Indian cities. Together with ongoing developments in road, airport, waterway, and digitalization of the sector, we believe India’s logistics are bound to become more efficient and globally competitive over time.
We remain optimistic about the current industrial CapEx cycle in India and expect future growth to come from lower-tier cities, due in part to the government’s infrastructure development push. It is also worth noting that Indian corporations do not rely heavily on capital market flows as a major funding source, which not only reduces their volatility but also their beta. Moreover, the rise of domestic institutional and retail investors has reduced the reliance on global capital flows, which has contributed to the relative stability in the Indian equity market.
Exposure to the Indian market is never without risk. In our three decades of investing in the country, we strongly believe in having a bottom-up active strategy that focuses on long-term quality. That means avoiding companies that are highly leveraged or rank low on corporate governance, regardless of how their share prices perform.
An active strategy focused on quality is still very much fit-for-purpose in a market as bright as India.