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Primer: A Look at India's History and the Path Ahead

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Morgan Stanley are out with a long form primer on India.  A good read over a morning coffee.  The work Fairfax has put into establishing their “hunting license” should really start to pay off over the coming years.


Over the past 21⁄2 decades, India's GDP has risen 11-fold and equity market cap has risen 30x. We see India exiting the challenging past few years with acceleration in both growth and equity returns.

In 1993, when foreign portfolio investors were first allowed to buy Indian stocks, India's GDP and market cap stood at US$260bn and US$90bn, respectively. Since then FPIs have bought a cumulative US$217 billion In the 27 years since then, India’s GDP has risen 11-fold to US$2870bn, an average annual real growth rate of ~6.5%. The country’s equity market capitalization has increased by over 13% annually to US$2.7 trillion. The MSCI India index has outperformed the MSCI Emerging Market index by a factor of 2.

If our growth projections were to come to fruition, India’s economy would pass the US$6.4 trillion mark by 2030, with per capita income at US$4,279 – reaching the upper middle income country threshold. This implies a real GDP growth of 6% and nominal growth of 10-10.5%. A key ingredient to our forecast is our estimate that manufacturing as a share of GDP will rise from approximately 15% of GDP currently to 20% by F2030, implying that its goes from US$400bn to US$1175bn. We believe that the thrust toward a manufacturing-led growth will set in motion the virtuous cycle of productive growth of higher investment - job creation - income growth - higher saving - higher investment and India would be one of the few large economies offering high nominal productive growth.

The stars appear aligned for a new profit cycle. For an economy that is likely to grow at a nominal rate of 10% per annum, if the profit share in GDP hits its long term average of 3.5% over the next five years from its all-time low current level, it gives us an annual compounded growth in earnings of 23% for the broad market. By 2030, India's market capitalization could grow to US$6.4 trillion in line with GDP growth, an annual increase of 10%. With accelerating earnings and reasonable relative valuations, trailing underperformance in the past five years and strong policy traction, India seems set to beat EM equity returns in the ensuing five years.

To be sure, the journey toward a US$6 trillion GDP and market cap is not without its challenges and risks. We see risks to our base case from the global growth environment, and delivery and execution of policy reforms required to support the medium-term growth trajectory.



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Thanks for posting. Just based on the numbers cited in this report, the Indian stock market looks like a very poor setup - PE of 23.4 (a 1.6 multiple to EM average) 12.3% ROE does not scream value on a macro level, especially considering the significant inflation. I think there are better deals out there in terms of EM’s. This does not mean that there are good individual Securities available but this is a macro report and on a macro report, I just don’t see India as attractive.

One obvious question to ask is why is India ROE so poor (12.3%). 12.3% is a disaster if you have 5% inflation. Who cares how fast the GDP grows in this framework?

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  • 4 weeks later...

Also, how are folks that are closer to India than I am judging Modi? He seems to be incompetent at best and perhaps even malevolent. In addition to the stretched valuation metrics (see above), this looks like a lousy setup for a stock market - high valuations, declining profitability and lousy leadership ( which really matters in Emerging or 2nd world countries).

India always has been the country that could but never actually got the job done. Why would this time be different?

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