India equities offer resilience and promise
With the country relatively insulated from trade and tariff wars, it’s a good move to buy into quality companies buoyed by long-term structural tailwinds
INDIA has had its fair share of news headlines recently, albeit for the wrong reasons. The Adani scandal has raised corporate governance concerns. We are seeing the first tinges of doubt creep into India’s rosy growth picture, given a slowing economy and more muted earnings results. Equity valuations appear perennially on the high side.
Here, we look closer at these areas of concern, highlight the reasons we are confident of the longer-term investment potential, and identify where the best opportunities lie.
Speed bump in promising growth journey
India has been one of the world’s fastest-growing major economies, supported by a resilient macro backdrop. Recently, its growth story appeared to have lost some lustre, with GDP growth slowing to a near two-year low of 5.4 per cent.
Multiple factors contributed to this, including weaker consumer demand and reduced government spending, but we expect this to be a temporary lull. While urban demand may remain affected by near-term inflationary pressures, there are signs that the long-overdue recovery in rural demand is coming through gradually.
Government spending on capital projects is also expected to pick up again, now that the disruption of the general election is over, and the extended monsoon rains have finally ceased, allowing construction activity to resume.
Meanwhile, after a prolonged period of interest rates being held firm, there is increasing scope for the Reserve Bank of India (RBI) to announce a rate cut at its next policy meeting in February, and for some of the liquidity tightness affecting India’s all-important financial sector to ease.
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Looking ahead, the country also appears more insulated from the potential impact of a Trump 2.0 scenario. With a lower trade surplus, a significant portion of its exports come from services – particularly Indian IT services where the US is a major end-market – and revenues are largely US dollar-denominated. About 80 per cent of India’s GDP is domestically driven, with exports making up only about 20 per cent.
This domestic focus, coupled with structural growth potential, positions India favourably. The RBI has also accumulated reserves to defend the currency, and lower oil prices further benefit the country.
On the earnings front, we have seen a third straight quarter of slowing earnings growth. This has been primarily driven by the energy, financials and consumer sectors, which make up a large share of local indices. But other sectors such as industrials are still registering robust growth.
We are positive about the outlook, and expect our core quality holdings to continue to deliver resilient earnings growth, regardless of macro conditions. Their earnings growth remains healthy, with strong fundamentals, including pricing power, robust balance sheets and the ability to sustain margins.
Valuations: Recent corrections a chance to accumulate
India equities are expensive, commanding a greater premium now than before the Covid period. In 2024, the market re-rated further, especially in the small- to mid-cap space.
Currently, the MSCI India Index is trading at a forward price-to-earnings ratio of 23.7 times, which is 1.8 standard deviations above its 10-year average. Its premium over the MSCI AC Asia-Pacific ex-Japan Index remains elevated at about 76 per cent; the five-year average is at 55 per cent.
Some of this increased premium, however, is justified by the improving macro backdrop and the impact of reforms feeding through to the broader economy. Corporate India is also in better shape than in the past, reflected in steady earnings growth.
For the equity market, it is important to understand the change around domestic flows, too. We are seeing increased retail buying, given a notable shift towards systematic investment plans, under which investors commit to regular monthly investments in mutual funds. We are also seeing greater domestic institutional participation that has more than offset foreign selling.
In the year to date, net selling by foreign institutional investors has totalled US$2 billion, whereas domestic institutional investors have remained net buyers for the 16th straight month, with inflows of US$59 billion year to date. This change is structural, and means that some of the India premium is likely to remain.
Nonetheless, there is still some froth in the market, which is why we welcome the recent pullback, and view this as a buying opportunity, given our positive long-term outlook. Ultimately, we need to take a bottom-up view and assess valuations on a stock-by-stock basis.
Scandals don’t reflect entire landscape
Corporate scandals in India have a long history, underscoring the need for stringent due diligence. More recently, we have seen one case making the headlines – that of Indian billionaire Gautam Adani, who was charged with fraud by the US on Nov 20. He stands accused of orchestrating a bribery scheme and concealing it to raise money in the US. This triggered a sharp sell-off in the domestic market towards the end of November, amid concerns over environmental, social and governance standards as well as corporate governance.
However, these allegations are largely specific to the Adani Group, and not reflective of the entire Indian corporate landscape. Historical market behaviour shows that investors view such cases as idiosyncratic, affecting only the implicated parties. If other Indian companies maintain robust corporate governance, transparency and ethical standards, foreign investors are unlikely to be deterred from investing.
Where the best opportunities lie
We believe that buying into quality is key to leveraging India’s potential. This means investing in well-run companies with steady cash flow and strong balance sheets, which lend some degree of defensiveness, even in tough times. The best opportunities lie in areas benefiting from long-term structural tailwinds.
One investment theme is aspirational consumption. As GDP per capita increases, the middle class expands, leading to higher demand for goods and services. This shift is evident in the “premiumisation” trend, marked by consumers’ preference for higher-quality options.
Another promising area is the growing demand for better healthcare services. As wealth rises, India needs to balance top-notch treatment in urban hospitals with suitable medical facilities for rural areas.
Urbanisation goes hand in hand with infrastructure development. We are invested in the real estate sector, which is in the early stages of a longer-term recovery; other indirect beneficiaries of this turnaround are, for example, construction and building-materials companies.
Digitalisation is also transforming the landscape. The India Stack provides online access to data and services for citizens and businesses, opening new growth areas.
India also faces challenges from chronic power shortages. Recent projections suggest that solar and wind energy deployment could double by 2028, offering investment opportunities.
India’s growth story remains compelling as we head into 2025, despite short-term challenges. This is driven by supportive central government policies and a decade of necessary economic reforms, putting the country on a positive trajectory.
In a Trump 2.0 world, India is likely to offer resilience and promise, given that it is relatively insulated from trade and tariff wars. The best way to capitalise on India’s promise is to buy into quality companies that benefit from long-term structural tailwinds, including aspirational consumption, urbanisation and digitalisation.
The writer is senior investment director of Asian equities at abrdn
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