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Why this top-performing stock market has fallen out of form · On The Money

• 0:03
  Kyle Caldwell: Hello. I'm Kyle Caldwell, this is on the money, a weekly look how to get the best out of your savings and investments. Today's episode looks at the prospects for investing in India, which has been a top performing stock market over the past decade and particularly performed well following the COVID nineteen pandemic. Just to showcase how strong the performance has been since the pandemic, over the past five years, the average India funds is up just over 86% which compares favorably to the average UK oil companies fund which is up 57%. However, returns have cooled lately with the average India fund down 17.4% over the past three months and down 15.8% over the past six months.
• 0:52
  To find out why the sell off has occurred, my colleague Sam Benstead recently interviewed Hiren Dasani, lead manager of the Goldman Sachs India equity fund, which was earlier this year added to Interactive Investors super 60 list of fund ideas. The interview also covers whether the fact that India stock market is trading on a higher valuation than other emerging markets is justified, whether Donald Trump's tariffs are a headwind for India, and makes the case for active for management as opposed to investors owning the market through an index fund or an ETF.
• 1:31
  Sam Benstead: Hiren, thanks so much for coming on our podcast. So India has been one of the top performing markets over the past decades. Your fund is up about a 60%. The index up a little bit less than that. So what's been behind the exceptional returns from Indian equities?
• 1:48
  Hiren Dasani: Thank you, Sam, and, very happy to be here today. If you think about India, it's a great long term compounding story. And today, India is at about $2,500 per capita income. And over the last twenty years or so, the real GDP has grown at about 6% annualized. And when you look at annualized growth of about 6% real and 10 to 11% nominal, over time, it becomes a great compounding return story.
• 2:21
  And the and the good thing about India is that still there is a long runway to go from here on as well. So to put things in perspective, China is at $10,000 per capita income. India is at 2,500, and obviously developed markets like United States and and Europe would be in excess of $4,050,000 dollars. So there is a long runway to go. It's a very young demographic.
• 2:43
  It's domestic consumption and infrastructure driven story, and, the growth is relatively less correlated. So all these reasons make India a very compelling investment opportunity in my view.
• 2:56
  Sam Benstead: And has this rally driven up valuations of Indian shares? So how expensive are they compared to, say, The US or The UK or actually other emerging markets too?
• 3:08
  Hiren Dasani: Yeah. So so let me take that question in a couple of different die dimensions. And the way we think about India's valuations is that if you buy something which is high quality, consistent compounding business, you are never going to get it cheap. And India is one of those high quality compounding growth stories. So India's valuations always need to be thought in that context that is the growth much more structural?
• 3:36
  Is the growth less volatile? And, is the growth less correlated? So because of these reasons of stronger for longer growth and less volatile nature of the growth, India's valuations always tend to be at a premium compared to the rest of the emerging markets. Now as things stand today, the valuations have cooled off somewhat in the because of the correction in the market over the last six months or so. And, valuations of India are at about 18 to 19 times one year forward multiple as we speak today.
• 4:12
  Those valuations are broadly more in line with India's last ten year average history. If you look at the relative valuation premium of India, it is still trading at a premium to the rest of the emerging market, but the relative premium is now back to last five year or ten year average or or even below on some of the metrics. So India will always trade at a premium because of the longer runway for growth and less volatile growth. But compared to its own history, valuations did get stretched to some extent last year. And over the last six months, we have seen healthy correction in the valuation.
• 4:49
  Sam Benstead: So that correction in valuations, what's been behind that? Looking at your funds over a year, the returns have just turned negative, and and this year has been tricky too. So what's behind that correction in in valuations and fallen share prices?
• 5:02
  Hiren Dasani: Yeah. So I think it is more about combination of soft patch of economic growth combined with the fact that the valuations had become rich to start with after two and a half years of very strong performance. Also, the fact that somewhere around September, the other markets in Asia, especially the bigger markets like China, started to look more attractive as there was a sense that there is a floor of economic activity which is being put in China by the policymakers. So combination of India specific factors, like India had a slightly soft patch of economic growth between March and November. That was a combination of some slowdown in the government spending around the election time or even after the election results were known.
• 5:52
  For a few months, the government machinery did not pick up in terms of execution, and the spending was a bit muted. On the other hand, you also had higher interest rates, tight monetary policy, less liquidity in the banking system. So overall, monetary policy and fiscal policy both were quite, restrictive, and that led to soft patch of economic growth. It coincided with the fact that after strong returns in '23 and '24, the relative valuations of India over the rest of the region has also become more expensive compared to its own history. And as I said, China started to look a bit more attractive because of their own policy announcements.
• 6:34
  So all of this combination, all of this led to, I would say, lower valuations or the correction in the valuations over the last few months. And, the good news is that none of this thing is more structural. We are very confident that there is, you know, long runway here. And the reason why we are not worried from an economy perspective is that the country's balance sheet is in very strong shape today. So fiscal deficit, current account deficit, inflation, all of them are looking quite good.
• 7:03
  Corporate balance sheets are also quite healthy, so we don't need to worry about any deep rooted problem from a macro perspective. And valuation correction has been healthy, and then it is proving to be a good opportunity for those who kind of missed out earlier on making India allocations.
• 7:21
  Sam Benstead: And what types of companies have been performing well over the past decades in India? What are investors buying when they when they invest in the markets?
• 7:29
  Hiren Dasani: So, generally, when you come to India, you come for consumption related businesses because many many consumer categories are still in decency. And you can almost rewind the playbook of what has worked in some of the more middle income economies over the last fifteen, twenty years. Many of those consumer categories, whether it is consumer appliances, autos, Internet services, when many of those consumer related businesses tend to do much better as the per capita income increases and disposable income grows. So consumer is one area where you always find a lot of interesting opportunities. Historically, financial services and IT are also the other two areas of interest.
• 8:16
  And financial services because of under penetration of the financial services, whether you look at banking sector loan to GDP ratio, whether you look at credit card penetration, mutual fund, or insurance penetration, whichever way you look at it, there is a huge under penetration today. Just think of it this way that of 1,400,000,000 population of India, there are only about 50,000,000 Indians who are investing in the domestic mutual funds. There are only about hundred million Indians who are investing in the equity markets. So that tells you the extent of the under penetration of financial services. And the other area of IT, obviously, India is home to large pool of software talent.
• 9:01
  India has a lot of, IT resources available. And historically, India has been office to the world, just has been China has been the factory to the world. India has been more like an office to the world. And those are the sectors where historically the very interesting businesses have to be found. Beyond these three sectors of consumer IT and pharma, I would say health care is also a very interesting business in India where not only the domestic health care services like hospital chains and diagnostic chains and so and so forth, but also generic pharma businesses.
• 9:38
  So you might be surprised to know that 40% of US generic drugs are produced in India, by volume. And India has good chemistry skills. India has competitive cost of manufacturing for the generic drugs. So that is also one area of interest historically.
• 9:55
  Sam Benstead: You're based in Singapore, and your team is in India. So would you say India is a stock picker's market, and does it help to have boots on the ground when looking at companies? Or is it actually effective to buy a tracker fund in India?
• 10:10
  Hiren Dasani: I think active management makes much more sense in India compared to the passive or tracker fund. And the reason for that is that average India Manager tends to generate better alpha compared to, let's say, an average EM manager or average US manager. Relatively, India is still less efficient market compared to the developed markets like US or Europe. And, that's where it makes sense to go for active management because there is an alpha generation potential. And second point is the cost of passive versus cost of active is also not very Unlike in The US, where cost of passive is significantly lower, in a market like India, if you were to buy a passive tracking ETF versus an actively managed fund, the costs are not very different.
• 10:58
  So, yeah, I mean, the alpha generation potential as well as the cost of active versus passive, I mean, on on both those counts, it makes sense to go active in India.
• 11:07
  Sam Benstead: China is the other big individual emerging market that investors often look at, and there are clear similarities, similar population, for example. But why should India gain a place in portfolios over China? Why is it a better place to invest in China?
• 11:23
  Hiren Dasani: Yeah. I I don't think we should compare it one versus the other. It's never China versus India. It can be China and India both over time. Historically, it's not that India has done well only when China has not done well.
• 11:37
  India has done well quite a few times, over time when even China was doing well. So both these economies will follow their own path. And, over time, I think India's growth is going to be less linked to the China's growth. Unlike many other Asian economies, are far more dependent on China, India is far more domestic oriented. So to that extent, India's growth will be less correlated to China's growth.
• 12:05
  But, yes, there are parallels to be drawn there. I mean, if you look at over the last twenty years, whether it is in terms of per capita income, urbanization, penetration of various consumer categories, electricity usage. You can look at variety of economic parameters, and it feels very similar where China was twenty years ago. So if India were to follow the path of growth, which China has done over the last twenty years, I think there is a huge amount of value to be created. Now having said that, there are differences in the economic models of India versus China.
• 12:42
  China historically has grown much more on the back of manufacturing and real estate investments and infrastructure investments. India historically has grown much more on the back of services, consumption. Going forward, India is getting more competitive in manufacturing. China is trying to change its growth model more in favor of domestic consumption. So so there is some convergence going to happen over time, but so far, the growth models have been very different.
• 13:14
  And and lastly, but also importantly, China is a single party political system. India has a democratic setup. And in a democracy, you always have greater kind of checks and balances, and the institutions become stronger over a period of time in a democratic setup.
• 13:34
  Sam Benstead: And where does India sit in the global economy? Is it exposed to tariffs from Trump or geopolitical tension?
• 13:42
  Hiren Dasani: And could it keep growing regardless of these external factors? So, yes, there are trade negotiations going on as we speak between India and The US. There is a worry of, reciprocal tariff as president Trump has talked about whether that leads to higher tariff on on Indian imports. If you put things in perspective, India's trade deficit is far lower compared to, let's say, some of the other Asian countries, which rents far higher trade deficit with The United States. I think the issue which is currently being negotiated is about greater market access, to India on some of the categories of agricultural products and and the others.
• 14:24
  Our sense is that, yes, those negotiations can be lengthy and tricky, but eventually, there are no very big sticking point which will prove to be a hurdle of of coming to an agreement between India and US. And I think geopolitically, both countries are fairly well aligned. Both are democratic countries. US sees India as its ally. And, yes, we think there are some trade negotiations which need to get sorted out, but it is not a not a big problem in our view.
• 14:56
  Sam Benstead: And to finish here, what would you say is the biggest misunderstanding investors typically have when investing and thinking about India?
• 15:04
  Hiren Dasani: I think one misunderstanding or misconception we hear about India a lot is risk about corporate governance, whether minority shareholder rights will be protected or not, and and so on and so forth. And sometimes you have one or two bad examples of corporate behavior, which creates a lot of negative media headlines. But if you look beyond those media headlines, then the institutional framework of corporate governance is one of the strongest in India, among all the emerging markets. Now the reason I say that is that if you look at the regulatory architecture, whether it is capital market, financial market regulator, banking sector regulator, those are all fairly independent regulators. The corporate governance norms, whether it is about minority shareholder protection, you know, tender offer, related party transactions, board independence, diversity on the board, net neutrality, carbon emission on a variety of corporate governance related norms.
• 16:10
  India has done a far better job in setting up that institutional framework and pushing the companies to adhere to that over a period of time. Some of them will do it in spirit. Some of them will do it in letter, But, that's where the role of active manager lies. And I think by and large, the institutional framework is is very healthy for corporate governance in India.
• 16:33
  Sam Benstead: Hiren, thanks very much for coming on the podcast.
• 16:36
  Kyle Caldwell: My thanks to Sam and to Hiren, and also thank you for listening to this episode of On the Money. If you enjoyed it, please follow the show in your podcast app and do tell a friend about it. If you get a chance, leave us a review or a rating in your podcast app too. Enjoying the conversation, ask questions, and tell us what you'd like to talk about via email on 0tm@ii.co.uk. And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on the interactive investor website at ii.co.uk, and I'll see you next week.