Is the INDIAN MARKET worth another look? 🧐

The Indian Equity Market has been surprisingly resilient, with it being one of the best performing in the region YTD, and second to only the S&P 500 Index. One of the questions we need to answer is definitely why the equity market appears to be so detached from the real economy.

Part 1: Economy - Impact of Pandemic

Covid-19 has actually cost India about 700 million USD in real and opp cost (20% of India GDP and it might continue to rise).

Authorities imposed one of the hardest lockdowns in the early days of the Pandemic and the economy did take a big hit.

Is the Indian Market now undervalued then? This could be a sector to look at and they could prove to be worthy investments over the long run.

Vaccination offers a sustainable path towards economic recovery

I personally believe that the reopening of the Indian economy will only happen when there is a similar rate of vaccination as in Singapore. This is currently however NOT the case.

One of the silver linings is that India can produce 5 million vaccine doses a day, and we can anticipate adequate vaccination levels taking place next year in June.

Part 1: Economy - Two Track Recovery

One thing to note about the Indian Economy Recovery has been that there was a big drop in employment (especially in lower-income households) in India due to covid measures. However, due to WFH, IT services and Financial Services have seen a net gain in employment.

This has allowed India to see a familiar K-Shaped recovery, as sectors that did not get affected by the pandemic have grown but those that did get impacted are struggling. Upper-income households, however, have a substantial increase in savings and this means that a lot of money is flowing into the stock market.

Part 2: Equity Market

Earnings & Retail Flows are Driving Market

This explains why the stock market and the Indian economy have not been correlated as retail investors have been buying stocks massively as well.

In fact, one of the few countries that have achieved growth in the corporate earnings of their top 50 companies would be India. To put this into context, in the last 10 years the earning growth of the India top 50 has been 9% CAGR while the mid and small-cap has been 5%. The total annualized return has been in line with earnings. Thus, the equity markets are pricing in strong earnings growth over the next two years with smaller and mid-sized companies outgrowing their larger peers.

My Opinion:

1. Bullish expectations, with the stock market pricing in 35% earning growth for 2021
2. Expectations for small/mid-cap companies being higher
3. Mainly due to retail participation and low-interest rate

How should be our strategy for Indian Equity then?

If anything, we should continue to look to hold best-in-class companies. This is because India, like all emerging markets, has a lot of uncertainty, and the large-cap is able to handle deal with uncertainty. (Despite the potential growth from small/mid-cap companies)

We should continue to try to diversify and not overweigh into one sector, quality businesses across all sectors.

For those who are looking into investing in other markets outside of the US,

You can slide into my DMs here.

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Talk more,

Ngooi