Assessing India’s Growth Story

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by James Calhoun, portfolio manager at Accuvest Global Advisors in Walnut Creek, California.

India is one of the biggest emerging markets, and a growing one, but is India’s growth reasonably priced?

To take a look at the opportunity set in India as an ETF investor, consider these key statistics:

• India’s expected earnings per share (EPS) growth is high: 26.6%
• India’s trailing price to earnings (P/E) ratio is high: 23.9x
• Foreign institutional investment in India surged in Q1 2019
• 26.6% expected EPS growth at a price of 23.9x trailing EPS appears “reasonable”

Growth

India's expected long-term EPS growth has increased from 15.5% in November 2017 to 26.6% in March 2019. Simultaneously, the rest of the world (an average of 34 other countries) has seen expected EPS growth decrease from 13.6% to 10.7% (see chart below).

Sources: MSCI, Accuvest

Value

India is currently the most expensive country in our universe, trading at a "lofty" 23.9x price-to-trailing earnings ratio.

This valuation metric was 23.2x back in November 2017, and has averaged 22.9x over the two years ended March 31, 2019. The rest of the world (average of 34 other countries) currently trades at a price to trailing earnings ratio of 15.6x, and has averaged 17.3x over the last two years (see chart below).

Sources: MSCI, Accuvest

Is India’s Growth Reasonable Priced?

Balancing (dividing) India's expected earnings growth by its P/E multiple yields a growth-to-value ratio of 1.1x (6^th out of 35 countries). The rest of the world exhibits a growth-to-value ratio of only 0.69, and the U.S. trades a growth-to-value ratio of 0.70x (see chart below).

Sources: MSCI, Accuvest

Recent price momentum suggests India's expected growth is both realistic and attractive to global investors.

The MSCI India Index returned 9.2% in March, outperforming 45 other countries. Over that same period, Indian equities saw foreign institutional investor (FII) inflows of $4.3 billion, the largest monthly buying seen in the past two years. 

Year-to-date through March 31, FIIs have bought net $6.6 billion in India equities, the largest among all of the emerging market Asian markets. Foreign institutional ownership (as % total India market cap) has increased to 19.3%, but still remains below the 2015 peak of about 21%. Sectors attracting the most assets in 2019 include banks, energy and utilities.

ETF Implementation

The iShares MSCI India ETF (INDA), the WisdomTree India Earnings Fund (EPI) and the iShares India 50 ETF (INDY) are the most popular India ETFs by total assets. Each offers different tilts when it comes to sector exposure.

Relative to INDA, EPI offers higher allocations to energy and materials, and lower allocations to consumer staples and technology. Meanwhile, INDY—relative to INDA—provides meaningfully higher exposure to financials paired with less exposure to technology, health care and energy.

Conclusion

Forecasted earnings growth can shift higher for a variety of reasons, but confidence around India’s growth is rising.

Given a stable political environment, an accelerated pace of reforms and a huge surge in working age population, India appears well-positioned to deliver high economic and corporate profit growth.

Only the future can tell, but foreign investment and price momentum suggest that 23.9x earnings is a “reasonable” price for India’s 26.6% EPS growth. This goes to show, when growth is in short supply (globally), growth at a reasonable price can be increasingly expensive.

Sources: Accuvest, MSCI, Goldman Sachs Research

For a list of all relevant disclosures, please click here.