BPM Talk

David Kitai (0:09)
Hello and welcome to the BPM talk podcast. My name is David Kitai.
Regular listeners may know that the episode before this we discussed the concept of single country investing with David Jones, director of iShares investment strategy at BlackRock, and Rohit Gupta, VP and quantitative researcher at MSCI. One of the themes that emerged from the conversation was around the raising opportunity and the growing opportunity that now exists in single country investing. I am very lucky to say that we have been rejoined by David and Rohit for another episode.
Rohit, David, welcome back.

Gupta, Rohit   
Thanks David.

Jones, David   
Thank you.

Gupta, Rohit   
Thanks for having us.

David Kitai (0:41)
It's a real pleasure, guys. You know, you've got good guests when you invite them back. Let's start in now the largest country in the world by population, because from 1990 to 2019, India's 6.5% annualized GDP growth rate outstripped other emerging markets, though it lads China’s 9.3% according to IMF data, but in around 2021 - 22, India's growth rate has surged to around 8% and has overtaken China. What makes Indian equities so attractive now, and why should investors be seeking opportunities in the Indian market?

Gupta, Rohit (1:20)
So let me take this one first because I'm based out of India, let me throw some light over here.
I think it's more of a macro structural growth story. Uh, where Indian economy had been historically it has been providing higher growth rates related to both the emerging and developed economies.
So if we look at the Indian economy as of now, it is the world's fifth largest economy. And as you mentioned that it's one of the fastest growing major markets. So as a result, it is projected to become the world's third largest economy before the end of this decade, with the GDP per capita for this economy is also expected to touch around 4000 years dollars by 2028. All these are IMF predictions. There are five key trends which are driving the overall growth over here. So, we might have all heard about the India's digital transformation and how digital payments are being made quite quickly over in India and quite recently a lot of infrastructure development push has also been done by a lot of government initiatives.
So overall, India's digital transformation and infrastructure development push is 1 strong point why the economy is flourishing. The other is that where India is sort of world's capability center, right, where it has a more than 50% market share of the of the entire world's global capability centers.
What and how it helps is it creates a pool of skilled workforce which is locally available for all the companies to utilize, right? So it creates a skilled resource available within the local economy.
The third key trend is Andy briefly touched this in the last podcast as well that there's a realignment of global supply chain. Now this is also benefiting India because India has been pushing a lot on its manufacturing sector with some of the government initiatives like make in India agenda.
Fourth is what we have all read is that India enjoys a favorable demographics.
There's a lot of young population that is available in India and what it creates it it brings a lot of people into the workforce, which in turn is responsible for again feeding the growth of domestic consumption. And lastly, it is also some of the sustainability related policies and targets which the government has undertaken in order to make India a net 0 carbon emitter by 2017.
Now all these policies and trends that I've spoken about, they also tend to be in continuation now after the recent elections that we witnessed in India. So the incumbent government again came into power, and it's expected that these policy initiatives would continue to make this structural growth story to grow in a certain way. The way it has been doing for last 10 years.

David Kitai (4:43)
OK. That's a fascinating picture, David. Before I asked him follow-ups. Did you wanna add anything in terms of the the broad picture on India?

Jones, David (4:50)
Yeah, I mean, I think Rohit covered a lot of the fundamentals, a lot of the macro of why in the is a success story in the, in the eyes of many investors and why we as well are quite positive on India.
You know, I think I can touch, maybe add a little more about some of the market factors. You know, I think what we've seen is a lot because of these, these fundamental factors that really has touched on. We've seen a lot of interest, a lot of inflow. Global ETP flows or exchange traded product flows into Indian equity exposures. You know it hits 6.8 billion in 2023. You know that that that is a record. So we continue to see substantial interest from foreign investors into India and just the growth of Indian domestic markets has has been able to accommodate that the the weighting of India in some of the key indices like the MSI emerging Market Index has doubled to about 17% over the last four years or so. And this growth is something that part of us just want to be part of. Umm, you do?
I mean the the question with India has always been, you know, some of the issues around capital controls whether you know foreigners will be able to get their money back and what we have seen is that the you know the government which is returning to power perhaps in coalition with other parties has generally followed a market friendly approach and has eased many of these concerns.
And so, for all these reasons, you know, we definitely like India among merchant markets.

David Kitai (6:31)
Hmm. OK, now and I don't know if we want to get too much into granular and we are not going to necessarily talk about specific businesses, but within India, I mean, are there any sectors or subsectors where you see particular growth themes? I mean, you'd mentioned some of the infrastructure development that's going on there. What? How has that played into equity returns?

Jones, David (6:48)
So you know we see a lot of different opportunities within India. You know, I think one of the interesting components is that you know, the growth of services and even you know the ability to export services, you know globally is fairly unique and there's an opportunity that's foreign investors definitely want to be part of. We also very much like India from, you know a factors perspective.
It's one of the one of the main ways that we we take a look at not just emerging markets, but all markets in particular and what we see when we look at India, you know, we see profitability of companies, we see low volatility. We see large size, we see good growth. You know all these are the exactly the factors that have been driving global markets as well. And so, you know, I I think you know those those factors though are balanced in a way by valuation. One of the things that perhaps gives global investors some sort of, you know, reticence or gives them pause a little bit is the valuation of of Indian equities. They're, you know, that they are fairly rich, you know, particularly compared to other emerging markets. But you know to us, we think the valuations are justified.
You know, we think they are not, you know, over exuberance or positioning, but rather they reflect the stronger earning potential and growth that Indian companies can provide.

Gupta, Rohit (8:13)
You know, I mean, I would like to add to what David just mentioned. And he mentioned something about how India is leading the way in terms of exporting its software and services product. So, we have this useful MSCI economic exposure data set, and when we look through that, there's a unique insight that comes into the picture. It's that the Indian IT sector overall it just includes 1 industry group which is software and services stocks and of this entire sector 94% almost 94% of its revenues, these are actually sourced from outside the country and the largest source of these revenues are from the US, followed by the Europe.
And it's not just the software and services industry group. There are other industry groups, like pharmaceuticals, telecommunications, automobiles and components, which have a sizable exposure to international revenues. And what our research says is that overall, the countries sectors in industries which have a higher proportion of international revenues, plus they also have sort of a manufacturing orientation, right. They tend to be slightly more export driven and are likely beneficiaries of the trend towards the globalization.

David Kitai (9:42)
Again, fascinating and again comprehensive and I've been using that word. I know between both of our episodes here, but it it so I think encapsulates some of the knowledge that you folks are bringing. My final question on India is actually one of just and David highlighted it slightly is just any risks that are there that you see and you think investors need to be cognizant of when they when they work with India and they add Indian exposure to their portfolios?

Gupta, Rohit (10:10)
So overall, I think David mentioned it briefly that valuations has been a concern. So that is what even what we found in our analysis that over the past two decades, Indian equities have almost always traded at a valuation premium to emerging markets. And we also looked at the varying sector returns. So, we compared the sector returns, you know, with emerging markets and world sectors.
So world is what is it presentation of developed markets. MSI World Index and what we found that overall Indian Sect India Indian equity sectors are they almost all the sectors had provided higher returns compared to both the EM and developed market sectors. But the risk that came into picture was all of these returns came at the cost of higher risk. So overall, the volatility of all the sectors were on the highest side and hence overall MSI India index, they tend to have higher or more volatile stocks and this risk was specifically high and real estate and communication services sector. So, this is from the point of view of and when we look at Indian equities from MSCI India index perspective, now there's some market accessibility issues as well, which is like a broad concern for foreign investors investing into Indian equity markets. And some of this brought briefly David mentioned.
So there are four main concerns that investors have. The first is the openness to foreign ownership.
What I mean by that is that there are several companies which are still subject to sort of foreign ownership limits and this could be ranging from, let's say 0 to 74% which what it does it it leaves slightly lower room for foreign investors to invest in such stocks. The second major concern that international investors might have is the ease of capital inflows and outflows, right? Because there are no offshore currency markets and also at the same time there's some constraints on the onshore currency markets. So, this creates some sort of hindrance for foreign investors. The third major constraint or issue that foreign investors face is sort of a market entry.
So there are some sort of mandatory regulations in registrations which the local regulatory body, which is the CAB in India's case they need to get some sort of approvals from such bodies.
And lastly, there are some sort of issues regarding the availability of investment instruments because the local regulator, they impose some sort of restrictions as well on the use of particular instruments or stock market data which is listed or local exchanges. 

David Kitai (13:23) 
Thank you. And again a fascinating answer and interesting to kind of see some of how India has changed. with regards since none of those regulations and what's still there. 

So, with that, though, I think we're gonna have to end there as much as I would like to maybe continue this conversation forever. I can only say again. Thank you, David, and thank you, Rohit, for such fascinating insights that are just absolutely crucial for investors to get a handle on today. Thank you again.

Jones, David   
Thank you.

Gupta, Rohit   
Thank you.

David Kitai  
And thank you to all of our listeners for BPM talk. I have been David Katai have a great rest of your day.