Recently, Franklin Templeton shared a research article on the factors that are going to contribute to India’s growth recovery. Here are some of the interesting charts and other highlights from the same
Why the focus on India now?
Enjoying various structural growth drivers, India is expected to be the fastest growing economy for the coming 5 years at least.
Some key advantages that we as a nation enjoy are as follows:
- Rising incomes: Urban per-capita annual income is projected to grow to US$4,700 by 2030. This will boost spending power and likely accelerate the switch from informal to formal retail spending.
- Local Consumption: India-specific consumption patterns drive innovation not only within local companies, but also international firms.These companies are adapting their menus to uniquely local Indian flavors as well as consumption preferences; for example, increased vegetarian offerings compared to other markets.
- Global supply chain diversification: This theme is expected to benefit the technology and renewable energy industries with large manufacturers (e.g., from the United States, South Korea, Taiwan) to invest in India to offset potential future regulatory and supply chain disruptions in China as well as providing access to the domestic Indian market.
Reducing the burden of imported energy prices on inflation by diversifying the power mix
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According to the Ministry of Power, India has set a renewable energy target of 450 Gigawatts (GW) by 2030, with solar accounting for 62% of this new capacity. Current renewable energy production in India is equal to 39% of total power production.
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Assuming fossil fuel production continues to grow at 5% annually, renewables would account for 56% of total production by 2030. The diversification of India’s power mix should eventually ease pressure from imported energy on inflation over the long run.
Indian Equities - Strong fundamentals and performance potential despite valuation premium
India’s declining risk premium
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One of the attractions of the Indian market is the declining equity risk premium, which at 4.9% is less than half that of China at 11.7%.
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The decline In India’s equity risk premium over the past five years has been driven by a reduction in the risk-free rate, which in turn is a function of lower inflation. Economic reforms, in particular tax reforms, have increased the productive capacity of the economy.
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This has been a particularly important support for the market in the first half of 2022, given that foreign institutional investors were net sellers of approximately US$28 billion of Indian equities, which was offset by domestic institutional investors buying net of about US$30 billion, buoyed by inflows to local mutual funds.
Double digit earnings growth
- Earnings are expected to grow at a double-digit rate in the coming quarters and be more broad-based, with support from pent-up demand post reopening, industry consolidation and market share gains by formal sector companies from informal peers.
Higher ROE and returns
- India has dramatically outperformed other emerging markets peers over the short and long term and even outperformed developed markets (as measured by the MSCI World Index) slightly over the past five years.
- India has historically achieved double-digit return on equity (RoE), driven by elevated net margins. The MSCI India RoE in the second quarter of 2022 was 15%, compared with 13% for the MSCI Emerging Markets Index and 10% for the MSCI China Index thereby enabling investors to invest new capital or re-invest dividends received at high returns given the potential growth opportunities in the economy
Do you agree with the above assessment by Franklin Templeton? What are you looking forward to the most?