In a recent note, the brokerage said that continued reforms should maintain India’s ‘Fastest growing large economy’ status, adding that strong trends in domestic flows have reduced market volatility and decadal low foreign ownership offers a valuation cushion.
Furthermore, the RoE (Return on Equity)-focused corporate sector with 167 companies with over $5 billion market cap leaves ample choices to investors, noted Jefferies.
India will be 3rd largest economy by 2027
The brokerage highlighted that over the last 10 years, India’s GDP has grown by 7 percent CAGR in USD terms to $3.6 trillion – jumping from the 8th largest to the 5th largest economy.
“The GDP grew even as there was an impact of several major reforms (bankruptcy law, GST implementation, real estate regulation act or RERA, demonetization which gave an impetus to the digital economy driving formalization); which were good for the long-term but adversely impacted near-term growth,” noted Jefferies.
Over the next 4 years, it sees India’s GDP touching $5 trillion making it the 3rd largest economy by 2027, overtaking Japan and Germany, being the fastest-growing large economy with the tailwinds of demographics (consistent labour supply), improving institutional strength and improvement in Governance.
India is not only projected to grow at 6 percent over the next 5 years, but the country will also be a standout in a world where most large economies are expected to see their growth rates decline. The brokerage believes that rising growth outperformance, particularly against the developed world, should help India climb up the world’s GDP ranks quickly to the third spot before this decade ends.
India market cap
Jefferies also mentioned that India’s market cap is currently the fifth largest globally at $4.5 trillion. As per the brokerage, Indian equity markets have been able to generate consistent 10 percent annual returns in USD terms over the last 5/10/15/20 year periods; much better than any of its global peers in the emerging market space. With a renewed capex cycle and robust earnings profile, it believes that Indian equity markets will continue to deliver 8-10 percent dollar returns over the next 5-7 years. Structural domestic flows arising from the shift of savings to equities and the potential listing of large unicorns in India can drive the market cap past $10trn by 2030, it added.
However, it also pointed out that despite the rise in India’s market cap, India’s weight in global indices is still low at 1.6 percent. US ($44.7 trillion), China ($9.8 trillion), Japan ($6 trillion) and Hong Kong ($4.8 trillion) are at present ahead of India in the m-cap race.
As per the brokerage, this should change as market free float rises and some weight anomalies get sorted out. Assuming market returns in line with the last 15-20 year history and new listings, India will become nearly a $10 trillion market by 2030 – impossible for large global investors to ignore.
Jefferies noted that India’s weighing in the indices has started climbing, with the jump in the MSCI EM weight seen post-COVID being remarkable. The higher weights in global indices are also important from the crowding-in of foreign capital from multiple discretionary funds as well. A rise in country weight in a global fund could make Indian stocks a must-have for a much more diverse set of equity investors, beyond just the EM-focused ones, it said.
Key reasons behind these predictions
Supportive global geopolitics: As per the brokerage India has a vibrant democracy with 57 national/regional parties. The upcoming national elections in Apr/May’24 will have 1bn eligible voters. Successive governments have adopted consistent growth & external relations policies. India has excellent relations with the Western world, Japan, Australia and the Middle East making it a key beneficiary of China+1, it said.
Rising entrepreneurship/vibrant start-up ecosystem driving innovation: 10 years of investment downcycle and risk aversion trend has now inverted with housing upcycle and corporate D/E (debt-to-equity) ratio at an all-time low, informed Jefferies. India is home to 111 unicorns (market value at $350 billion) making it the 3rd largest unicorn hub globally after US and China. Govt’s focus on developing digital infrastructure, globally the cheapest data rates and the abundant homegrown talent pool have been the key drivers, it noted.
India now becoming a services exports hub: The brokerage pointed out that services export (incl remittances) now accounts for nearly $450 billion per year. Several large global organizations have 10-20 percent of their employees based in India including cos like JP Morgan, Intel, NTT, etc. Superior digital infra, and young & well-educated human resources should drive this segment to keep growing.
Strong corporate culture and a history of strong market returns: Jefferies informed that the RoE-focused corporate sector is a key positive for minority investors. The listed equity market is among the most diversified emerging markets. A strong institutional framework of regulators (SEBI, RBI), and intermediaries (responsible asset managers) has helped develop a large domestic investor base. Sustainable investment habits give visibility of $50 billion per year flow into equities from domestic investors which will likely keep the valuations on the expensive side but also reduce market volatility.
International investors should find the market opportunity attractive: Jefferies believed that a strong earnings growth profile, track record of generating peer-beating returns, rising India market weight, and deep markets should attract incremental foreign flows. The Indian markets saw $20 billion of equity flows in 2023, though it wasn’t as high as compared to previous levels as a percentage of market cap.
With growing awareness towards long-term savings into equities through mutual funds in India, the brokerage estimates the structural flows from retail to the equity markets at $30-35 billion per annum. Indeed, just reallocation within the savings pie is enough to sustain retail flows in the market. Auto-deducted monthly flows into equities (SIPs) are just 10 percent of annual incremental bank deposits; and can gain further share, it predicted.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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Published: 22 Feb 2024, 09:39 AM IST