“ A lot of domestic money flows into Indian equities , which keeps valuations elevated ,” Chedid explained . “ The market is also geared towards larger caps so it is quite concentrated towards bigger stocks with already higher valuations .”
Jim Masturzo , CIO of multi-asset strategies at Research Affiliates , recently described Indian stocks as the “ underweight of the decade ”, owing to its 27x cyclically-adjusted P / E ratio , which is 20 % above the firm ’ s high target for the country .
However , Chedid said Indian equities still represent an opportunity on a structural basis , given the country is at odds with other emerging markets whose growth is expected to slow .
“ Indian equities are one of the leaders in terms of expected returns and earnings in our longterm capital market assumptions ,” Berardi added . “ This reflects very well in diversifying your long-term asset allocations towards emerging markets , with India standing out .”
More than 99 % untouched
The uncharted and arguably more interesting territory is India ’ s $ 2trn bond market , with the country ’ s sovereign bonds only accessible without restriction since the introduction of the Fully Accessible Route ( FAR ) scheme in 2020 .
The key opportunity for rupee-denominated debt is the ability to front-run its inclusion in major benchmarks such as the JP Morgan government bond index emerging markets ( GBI-EM ) – tracked by $ 240bn last year – and global aggregate bond indices from JP Morgan and Bloomberg .
Goldman Sachs , Legal & General Investment Management ( LGIM ) and Morgan Stanley predicted the inclusion in the three indices could spell up to $ 40bn of instant inflows , with the latter also predicting $ 250bn inflows channelled into Indian fixed income over the next decade , compared to $ 36.4bn over the past 10 years .
JP Morgan began consulting investors representing 85 % of its GBI-EM benchmarks assets about India ’ s inclusion last summer with $ 270bn of FAR-eligible issuance available at the time . A recent statement from the firm appeared to be asking ‘ when ’ not ‘ if ’ the bonds should be included once issues of feasibility are resolved , according to Olivier Souliac , director , Xtrackers index strategy and analytics , at DWS .
Even with the number of FAR bonds jumping from four to 24 since the scheme started , only $ 2bn of foreign investment track their performance . Souliac said the fair weighting of Indian debt in global aggregate indices is similar to Spain ’ s at 2.5 % and could eventually hit the 10 % cap in JP Morgan ’ s GBI-EM benchmark .
“ India ’ s inclusion in the Global Aggregate index will not happen tomorrow but the an-
CHART 2 : GDP PROJECTIONS
Source : IMF World Economic Outlook 2023
CHART 3 : EXPOSURES OF JP MORGAN GBI-EM GLOBAL DIVERSIFIED 10 % CAP 1 % FLOOR INDEX (%)
Source : BlackRock SEML ETF
nouncement of its inclusion could happen this year ,” he said .
Souliac added the “ next step ” would be the enfranchisement of Indian corporate debt . While China ’ s bond connect scheme is still being finalised for corporate bonds , Souliac said India will likely undergo similar evolution with “ five years of shift ”, with eventual inclusion in global aggregate benchmarks once corporates are investment grade and accessible “ in the long-term ”.
Berardi noted India is primed for “ a new , strong investment cycle ” to support the high
number of people entering the labour market each year as corporates undergone “ massive deleveraging ” since 2010 .
The China in the room
2022 2023 2024 Asia 3.8 4.6 4.4 Advanced Asia 1.8 1.8 1.8 Japan 1.1 1.3 1.0 Korea 2.6 1.5 2.4 Taiwan Province of China 2.5 2.1 2.6 Australia 3.7 1.6 1.7 Singapore 3.6 1.5 2.1 Hong Kong SAR -3.5 3.5 3.1 New Zealand 2.4 1.1 0.8 Macro SAR -26.8 58.9 20.6 Emerging and Developing Asia 4.4 5.3 5.1 China 3.0 5.2 4.5 India 6.8 5.9 6.3 Indonesia 5.3 5.0 5.1 Thailand 2.6 3.4 3.6 Vietnam 8.0 5.8 6.9 Philippines 7.6 6.0 5.8 Malaysia 8.7 4.5 4.5
Indonesia 10.0 Brazil 9.96 Mexico 9.95 China 9.93 Malaysia 9.93 Thailand 9.80 South Africa 9.52 Poland 7.18 Czech Rebublic 5.60 Colombia 4.20 Romania 3.60 Hungary 3.26
To become the new emerging market posterchild , India has some capital markets maturing to go to catch up with China ’ s 10 % weighting in JP Morgan ’ s GBI-EM or its 33 % profile in MSCI ’ s EM index , more than double India ’ s footprint .
Berardi said China ’ s economic reopening may “ trigger further valuation readjustments ” in India as investors “ take turns favouring the pair in a binary way ”, which may help the latter to become more appealing on a tactical basis .
She added India is structurally supported by demographic factors including its median age being below 30 , compared to almost 40 in China , with its more ideally situated workforce also still undergoing the shift from agricultural to manufacturing and service labour that China started in the second half of the twentieth century .
“ There is some read across in terms of the large and growing consumer base but they are now at very different points in the demographic journey ,” Chedid added . “ China may surprise on the upside on a tactical basis … but beyond that , it is on a lower-growth trajectory .”
Jamie Gordon is senior features reporter at ETF Stream
MAY 2023 | ETF INSIDER 31