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US$4 trillion opportunity: Goldman Sachs sees no end to India boom

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India’s stock market has surged over the last 12 months amid a wave of optimism over one of Asia’s biggest economies, but Goldman Sachs Asset Management (Goldman Sachs AM) thinks the best could be yet to come.

The country’s benchmark SENSEX is up more than 20% over the last 12 months, with private banks ranging including UBS Global Wealth Management and Morgan Stanley Private Wealth Management holding overweight views on this market.

Much of that optimism, according to Hiren Dasani, co-head of emerging markets equity at Goldman Sachs Asset Management, derives from the strength of India’s economy, which is growing in nominal terms at about 10 to 11% annually.

“Over time, what we have seen is that corporate earnings have also grown in line with nominal GDP expansion, unlike some other countries where corporate earnings have not grown at the same pace,” he said. India has a nominal GDP of US$3.5 trillion and a market capitalisation of US$4 trillion.

“In the current economic cycle, India is already seeing an acceleration in earnings with growth close to 20%, and the market expectation is that the momentum will continue at least in the next two to three years,” he went on.

“We have maintained an overweight to India in our emerging market equity portfolios. We have a bottom-up approach to stock selection and see opportunities particularly in the areas of consumer discretionary, financials, information technology, real estate and healthcare,” Dasani, who also is the lead portfolio manager of GSAM’s India equity strategies, noted.

Best way to tap the India market

When it comes to how to best play India, foreign investors face restrictions on dealing in single securities. Therefore, some argue that mutual funds provide the easiest entry point – and country-focused funds are seeing significant inflows.

“Inflows into India’s equity market picked up last year. The market saw flows of about US$20 billion from foreign investors and some of that went into India-dedicated funds,” Dasani highlighted.

While there are limited India-focused funds in the market, many showed strong performance in 2023. Goldman Sachs AM’s India Equity Portfolio has returned over 30% over the past year.

Historically, private banks have not held country-specific views on India, and allocations were typically part of broader emerging market calls. “Over the past 12 to 18 months, however, we began to see more and more private banks with an overweight on India in their allocations. That’s what’s driving more flows into India-dedicated funds.”

HSBC Global Private Banking is another lender that has been bullish in India since last year.

“We prefer an active approach to India because actively managed funds have been able to generate alpha compared to the broader market,” Dasani reckons. “The fee differential between active and passive is also not very wide. Active portfolio management through diversified funds is probably the way to go for individual investors seeking exposure to India.

Is India expensive?

Given the rally in India, some have questioned whether the market is becoming expensive. Dasani believes the answer is no.

“The top question we’re getting is on valuation – are Indian stocks expensive or fairly priced? At about 20 times one-year forward P/E, valuations of Indian equities are fair in our view.” The forward price-to-equity ratio of the S&P 500, for comparison, is more than 21.

One reason, in his view, for why the stock market is trading at a fair price is strong visibility of corporate earnings growth. Another is strong macroeconomic fundamentals.

“Back in 2013, India had a high current account deficit, high inflation and low foreign exchange reserves. Today, inflation is contained at about 4%, the current account deficit is lower, and foreign exchange reserves are in excess of US$600 billion.”

Dasani added that funds have seen an increased participation from both domestic and foreign investors.

China or India?

India’s rise contrasts with the struggles of China, whose markets and economy are in the doldrums. Dasani is also quick to point out the differences between the two behemoths.

“Compared with other Asian economies, India’s growth is less correlated with China’s and is driven by domestic consumption and local infrastructure spending. In that sense, India offers diversification benefits in an investment portfolio,” he noted.

However, that is not to say that investors should write off China entirely.

“We do see a lot of opportunities in China on a bottom-up basis and valuations are quite attractive. In the short term though, there are some challenges relating to real estate and local debt. While valuations are attractive, investors may have to look to new areas for growth going forward instead of focusing on the sectors that used to drive growth in the past.”

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