Q India Investing Insights 2022

Quantum Advisors India

Building your India portfolio since 1990 on a foundation of ethics, integrity & disciplined investment research process.

Our 2021 India Investment trends and outlook was premised on a) global central banks keeping rates low and easy liquidity; b) global fiscal stimulus will continue and prop up growth; and c) low cost of capital and better growth prospects will lead investors to search for yield and growth driving capital into growth assets and emerging markets.

Well, Capital did flow chasing growth and returns.

In 2021, Global inflows into public equities of ~USD 1 trillion exceeded the combined net flows (as per BofA research) of the previous 19 years. Global Private Assets continued its bull run. 2021 turned out to be another year of USD 1 trillion of global fund raise for Private Equity, Private Credit, Real Estate and Infrastructure.

Global Venture investing came on its own in 2021. More than ~USD 600 billion of venture capital (VC) investment activity (2x of 2020) was reported and more importantly it was across geographies and attracted new investors. The size of the VC investments is staggering considering these market opportunities are not as deep as traditional public and private markets. That also explains the froth in valuation of start-ups.

India was also a key beneficiary of these flows. In fact, the VC investment boom in India was the biggest stand-out. As per VC Circle, data since 2011 shows that India now has 83 Unicorns (start up ventures with a valuation of USD 1 billion); 44 of those achieved that status in 2021. Total PE/VC investments in India in 2021 is estimated at ~75 billion of which VC was ~USD 35 billion. These are large flows which have essentially gone into building new Indian businesses, brands and markets. This bodes well for India’s economic recovery.

Table 1: The Risk-on Bull-run continued in 2021

(Source: Refinitiv, US Bond = AGG ETF, EM Bond = JP Morgan Local currency ETF; Crisil indices)

For the first time in more than 5 years, we are getting positive about the prospects of the Indian economy.

In our recent piece, India on the Cusp of a Sustained Economic Revival, we listed down five tailwinds which in the near-term, with some good luck and some sane policy making, can help get India’s real GDP growth above its 6.0%-6.5% trend level.

  1. Government shedding its fiscal conservatism and supporting growth over the medium-term

  2. India’s twin balance sheet problem of over leveraged corporates and stressed banking system mending its way into shape and positioned well to fund investments and capex.

  3. Global growth driving Indian Exports and capex recovery

  4. Residential real estate showing the first signs of recovery as a potential growth multiplier

  5. Availability of global capital especially as world looks to ‘China Plus One’

Economic Growth is important, not only for asset returns but also for macro stability. High and sustained economic growth has led to high relative returns from Indian assets over time.

We see these trends playing out over the medium term and not necessarily in 2022. Asset returns and investor flows may follow a calendar pattern, economic cycles do not. However, asset markets do price in eventual economic cycles ahead of time. We may be seeing the equity markets and the earnings estimates pricing in some aspects of these tailwinds.

Table 2: Q India Multi Asset Summary

(* - Real Estate is offered by Quantum’s affiliate Primary Real Estate Advisors)

Indian Equities: Premium valuation for strong earnings profile

The global economic rebound has been very encouraging. The pattern of the recovery, with the support of monetary as well as fiscal spending, should mean that the trend can continue for a while. The signs of an increase in global trade which is triggering global capex as well is leading to comparisons to the 2003-2007 growth phase. Even the rise in commodity prices from the lows of 2020 is similar to the rise seen from the lows of 2002 through to 2005. Global equities thrive in such a period of good growth and reasonable inflation.

Indian Equities did very well in the 2003-2007 period. The chart 1 below suggests, as long as the inflation was manageable, Indian Equities outperformed emerging markets and China. Of course, over the long-term now, Indian equities has continued its significant out-performance over EM and China.

Chart 1 and 2: India is Expensive for a reason: quality of companies; earnings and now domestic flows

(Source: chart 1 -Datastream; rebased performance of indices shows India’s relative performance; chart 2- Bloomberg Finance L.P, YTD 2021 till November 2021; FPI – Foreign Portfolio Investors)

The extent of the recent outperformance may make some investors to allocate away from India into other under-performing markets. Also, the P/E of the BSE-30 Sensex does suggest over-valuation. We should not be surprised by some relative underperformance. Also, a further sharp rise in commodity prices and/or a hawkish US FED could see market sell-offs.

However, that we believe would be an opportunity to increase your India Equity allocation. If the tailwinds that we highlighted above play out and we are indeed in the 2003-2007 cycle, then Indian equities and Indian corporate earnings have a long way to go. For the first time in over 5 years, we are seeing consensus earnings estimates being upgraded. Since 2014, as the nominal GDP growth slowed down, we would see analysts cut their year end EPS targets. For about 4 years, the BSE-30 Sensex earnings was flat. However, in 2020 and 2021, companies are beating sell-side estimates making them upgrade their estimates.

Chart 3 and 4: Indian Corporates may be entering a strong earnings cycle