Three Minutes on India

Portfolio Manager Peeyush Mittal, CFA, offers his views on the outlook for India, the coming elections and longer-term themes.

Political stability, economic growth and structural reform have worked well recently to support India’s renowned strengths, such as its entrepreneurial culture and sector specialisms like IT and pharma. They have also nurtured the rapid development of India’s digital economy and global manufacturing capability which has become particularly appealing to multinationals adopting China +1 strategies.

For equity investors, the challenge in the near term is navigating the rich valuations which have become a by-product of India’s robust markets, and getting sustainable growth at the right price. For the most part, we think the market is still driven by earnings growth tied to GDP expansion, which is a good thing, but we are seeing some disconnects opening—particularly in the small and medium cap areas where multiples as high as 50 times earnings aren’t justified in many cases.

It means fundamentals need to be looked at closely. It’s not enough to rely on tracking the indexes. That risks exposure to potential bubbles and missing out on genuine growth opportunities. To successfully invest in India requires local knowledge and a historical perspective as well as an understanding of how India companies serve and interact with their domestic and overseas markets and partners.

The Election and Beyond

As we approach India’s general election in spring, many observers think we could see a rally in Indian equities. We aren’t convinced. We think a re-election victory for Prime Minister Modi is pretty much priced in. Still, we think we will continue to see good performance from businesses involved in government infrastructure programs and in health care, from contract development manufacturing organizations (CDMO)—which provide outsourcing services to biotech and pharmaceutical firms—and from domestic pharma companies.

Post the election, should Modi win a third term, we could well see a broad rally in anticipation of more of the political stability and pro-business posture that have been the hallmarks of the Modi government since it took office in 2014.