Over the next decade, India is slated to overtake Germany and Japan to become the third largest economy in nominal terms. It is already the third largest in PPP (Purchasing Power Parity) terms. Of course, on an annual per-capita income basis, India at ~USD 2,600 is well below most Asian countries and a few African economies.
As per IMF’s recent estimates for 2022, India’s share of Global GDP in nominal terms will be ~3.35%.
This share will rise to well above 5% over the next 10 years.
Webinar: India for the Next Decade and Beyond
Featuring Arvind Chari, Chief Investment Officer, Q India UK, affiliate of Quantum Advisors India
We do know that economic growth creates opportunities. Opportunities for individuals, businesses, and investors. The outcome though may be varied for different segments.
For instance, in China, many global businesses have benefited by its economic growth. However, most global investors haven’t had such a pleasant experience. Global businesses may derive a large share of their business from China. However, we haven’t seen the same play out in the asset allocation of institutional investors.
Chart 1: India Economic Opportunity is reflected in Stock Market Returns
(Source: Refinitiv DataStream, All data in USD, GDP data is quarterly till June 2022, Index data is monthly till September 2022)
A share of global GDP weighted allocation to Chinese public equity markets would have been a disaster. Private market investing was faring better than public markets, however with the regulatory measures taken by the Chinese communist party, even those have unravelled.
The case in India has been different. Investors who have trusted the long-term GDP growth potential and allocated to public equities, have been rewarded with returns commensurate with the economic growth.
In many other global markets, GDP weighted allocation may not be a relevant measure. However, In India it may be one of the most important measure to decide an allocation.
India’s weight in Global GDP will rise above 5% by 2030. It is expected to be ~15% by 2050.
Chart 2: India was a large part of the global economy; India will be a large part of the global economy
(Source: Quantum Advisors; Angus Maddison, University of Groningen; Madison Project Database)
Are you ready to then allocate as much of your global portfolio to India? Also, the opportunity will present before the potential. Is your investment committee thinking strategically to invest and build up the allocation today, in order to benefit from this growth potential.
Table 1: Foreigners need to invest more than twice their current run rate to take their investable allocation to 5%
(Source: Bloomberg Finance L.P; Quantum Estimates; Global AuM investable outside of the home country is estimated as USD 100 trillion out of a total estimated Global AuM of ~270 trillion ; ) (* - We estimate market value of all foreign investment in India (public equity (USD 600 bn, fixed income (50 bn) and alternative private assets (850 billon) to be USD 1.5 trillion)
The increase in Foreign Investment in market value from USD 1.5 trillion to USD 5.0 trillion seems daunting. However, about USD 2 trillion of the incremental can be accounted for my market appreciation over a 10-year period. That leaves foreigners to deploy USD 1.5 trillion of new capital into India over 10 years. That is USD 150 billion per year. This is more than twice the current run-rate.
Based on the current trend, if 50% of new flows go into private assets like private equity, venture capital, real estate, and infrastructure; 35% in public equities and 15% in fixed income.
Annual flows of USD 150 billion are large, however, different segments of the economy have gotten larger, seen change in regulations, eco-system has developed and seem well prepared to absorb more flows.
Also, rising economic growth would mean higher incomes and a larger segment of the economy which attains critical size for global business to find it attractive.
Chart 3: India’s broadening income profile will create opportunities across segments
Traditionally, especially in public markets, India has seen allocation as part of Emerging Market, BRIC, Asia-ex Japan, Asia ex China. That has meant that India has remain under-allocated in global asset allocation.
Chart 4: Lazy allocation decisions has led to allocators missing out on India’s public market returns
Source: MSCI Indices, Data in USD, 20 year data; rebased to 100 from November 2002 till October 2022
The flows into Indian Private assets, dominated by private equity and venture capital, suggests that India dedicated funds are dominant. We are even seeing global pensions making a conscious decision to choose and invest in Indian Private and Real Asset Markets in a dedicated manner.
Chart 5: Higher allocations to private assets suggests a dedicated approach
(Source: NSDL, SEBI, IVCA, Annual Data till 2021; Private = Private Equity, venture Capital, Real Estate, and Infrastructure)
We would be encouraged to see this discussion take place in investment committees and boards of institutional investors to think of dedicated allocation to India. As we have shown, a GDP weighted approach is a simple and predictable way of thinking about your long-term India allocation.