India’s GDP growth came in at 7.2% YoY in 3QFY18, its fastest pace in five quarters, up from 6.5% in 2QFY18. The pick-up in GDP growth during 3QFY18 was mainly driven by investments (+13% YoY v/s 8.9% in 2QFY18), which rose at the fastest pace in 23 quarters.
Market Cap to GDP
India’s Market Cap-to-GDP has increased steadily from 55% in FY09 to 84% now based on FY18E GDP, which is above its long-term average of 78%. The significant increase in India’s market cap by 52% drove the increase in valuations to being fairly-valued.
Return on Equity
India’s high ROE, superior to most emerging markets has been an important differentiator for India’s valuation premium. While presently India’s ROE at 13.9% is below its long period average of 17% and peak of ~27%, it is still above most emerging markets and is expected to improve.
PM Modi’s reform agenda, strong forward earnings growth potential and high ROE has enabled India to out-perform most emerging markets since 2014. MSCI India (-5%) though underperformed MSCI EM (+1%), YTD CY18 due to imposition of long term capital gains on equities in India and exposing of a banking fraud.
P / E Ratio
India has traded at a significant premium to other emerging markets with a historical average premium of ~43% to MSCI EM. Post correction, the premium has reduced to 41% (52% in Jan). MSCI India currently trades above its long-term average at 17.1 x FY19E PE
Forward Earnings Growth
India’s 3QFY18 earnings began on a strong note. However, the loss posted by SBI (State owned bank) dragged earnings growth. Nifty 50 (benchmark) aggregate sales grew 13.4% YoY and PAT grew 7%. Excluding SBI, Nifty PAT growth came in at 16.6%. India is on track to deliver ~ 20% over the next 3-5 years and provides one of the best earnings growth profile, globally.
India Allocation in GEM Portfolios
GEM portfolios have been over-weight India since 2013 on hopes of a change in government. The emergence of a reformist, majority government led by PM Narendra Modi stirred GEM portfolios to increase their over-weight position further. This reduced a tad, on geo-political issues and high valuations.
GEM Investor Country Allocation
India has the third highest allocation in GEM portfolios at 10.6%. Earnings recovery and benefits accruing from the implementation of some key reform initiatives of the Indian government like GST may see increased focus on India. An upgrade of India’s credit rating by Moody’s also augurs well for allocations.
Foreign Portfolio Investors (FPI) Flows
Foreign Portfolio Investors (FPIs) invested US$2.0bn YTD CY18, after investing US$7.7bn in 2017. FPI’s pulled back US$1.9bn in Feb’18 on global sell off led by inflationary pressures, introduction of long term capital gains on Indian equities and unleashing of a banking scam. Strong economic data though enthused FPI’s to invest US$2.1bn in March.
India’s currency has been depreciating against the USD and AUD given its inflation differential. The INR though appreciated against the AUD over the past 3 years. With monetary and fiscal policy measures showing more stability and falling inflation the INR may show resilience over the next 3-5 years.