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India: Investing in the world's most expensive stock market

With the world’s largest population and currently the fastest growing economy, India offers impressive growth characteristics. But this comes at a price. In Shiller P/E terms, India is the world’s most expensive stock market. Raheel Altaf explains where he is finding opportunities in India at a reasonable price.

India: Investing in the world's most expensive stock market

28 May 2024

  Artemis

Artemis: India: Investing in the world's most expensive stock market

With the world’s largest population and currently the fastest growing economy, India offers impressive growth characteristics. But this comes at a price. In Shiller P/E terms, India is the world’s most expensive stock market. Raheel Altaf explains where he is finding opportunities in India at a reasonable price.

FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

In India, it seems everything is outsized. In 2022 the country overtook China to become the world’s largest population, with over 1.4 billion people.

It is currently engaged in the world’s biggest democratic process, as around one billion voters go to the polls in a general election. India’s economy has been growing at the fastest rate globally for the last two years and is forecast to continue to do so1. Currently the fifth largest economy in the world, it is forecast to be the fourth largest by 20272. While it is unlikely to be plain sailing – the country still faces significant poverty and high youth unemployment – the forecast growth figures are impressive.

Prime Minister Narendra Modi, who looks very likely to win a third term in office, has set a reforming business-friendly agenda over the last 10 years. This shows no signs of changing if he wins this election.

The past 10 years have seen vast changes. There have been reforms to taxation. One Nation, One Tax (GST), introduced in 2017, sought to simplify India’s complex tax structure and apply taxes uniformly across all Indian states. It creates a common market, promoting ease of doing business.

Investment in digitisation has been impressive. Building up the national identity system called Aadhaar, begun by the previous government, has laid the foundation for a payment system that 300 million Indians use every month. It has also enabled most households to get a bank account.

In addition to changing domestic policy, India has been a beneficiary of shifts in supply chains, particularly away from China. It has also benefited from its highly skilled IT workforce.

There is also huge investment in infrastructure through the government’s National Infrastructure Pipeline, with planned investments amounting to $1.4 trillion by 20253. This covers a wide range of sectors, including energy, roads, railways and urban development.

It is this last point, urban development, which underpins India’s growth trajectory and most excites investors. Currently 37% of the Indian population live in cities, compared to China’s 58%4. It was urbanisation in China that powered that country’s growth over the last few decades. India is set to benefit from the same trend.

But all of this comes at a price…

It’s not just population and economic growth figures that are outsized in India – so are equity valuations. In terms of Shiller P/E (a long-term measure of valuation that uses 10-year earnings figures), India is the most expensive equity market in the world, surpassing even the US.

Shiller P/E by region

Bar graph showing shiller PE by region

Source: Bloomberg as at 31 March 2024. Shiller P/E is the long-term price earnings ratio computed by dividing price by 10-year average real earnings per share. Real earnings per share is computed by adjusting the EPS ratio for the country’s consumer price index.  

This is largely due to a burgeoning domestic investor base. Increased wealth has led Indian consumers to invest in shares, which has driven up prices.

Foreign investors have also been attracted by India’s growth characteristics and have been prepared to pay a premium. As a result, the Indian stock exchange recently overtook Hong Kong’s to be the fourth largest globally.

Although we acknowledge India’s attractive growth characteristics, high starting valuations mean that any disappointments can potentially lead to big setbacks. We would also caution that performance has been driven by P/E multiple expansion rather than growth in earnings.

To put these valuations into context, we offer this comparison of very similar fast-food companies in India and China:

table showing diverging valuations for similar businesses

Source: Artemis, Bloomberg as at 31 March 2024. Image source: brandsoftheworld.com 

Yum China operates the franchises on Pizza Hut, KFC and Taco Bell and has 13,000 restaurants. It is trading on 18.5x earnings. In India, there are two equivalent businesses that do exactly the same thing. They run the same brands and there are only 2,000 restaurants between the two of them. And both those companies are trading on over 100x earnings. These Indian businesses are immature and can potentially grow very quickly. But they may also face challenges and a valuation of over 100x does not leave room for disappointments.

Where are we finding opportunities in India?

Despite much of the market being richly valued, we still have around 10% of the Artemis SmartGARP Global Emerging Markets Fund invested in India. Here are some examples of our holdings – all businesses with strong growth drivers but still trading on reasonable valuations.

As mentioned above, Modi’s government has been investing heavily in infrastructure of all types, including roads, railways, airports and digital connectivity. A couple of our holdings benefit directly from this. One is NMDC, India’s largest producer of iron ore and steel, which is experiencing strong demand because of the government’s spending programme. Another is Indus Towers, India’s largest mobile tower installation company – and one of the largest in the world. According to the company, three out of five calls made in India are through an Indus site.

The Indian government has also been focused on electrification and the broader transition to cleaner energy. We hold Power Grid, the government-appointed central power transmission utility. The company is one of the largest transmission utilities in the world, with more than a 50% market share in India. Economic growth, urbanisation and industrialisation are expected to increase India’s energy demands in the next few decades. Power Grid is also a beneficiary of the push towards renewables. A high proportion of its capital expenditure is committed to transmitting renewable energy.

We also hold Amara Raja, a technological leader and one of India’s largest manufacturers of lead-acid batteries for automotive and industrial use. In response to the clean energy transition, it is also diversifying through its ‘new energy’ business, which deals with lithium-ion technologies.

Looking ahead…

While we acknowledge India’s growth potential, we are mindful of its rich equity valuations. Our investment process focuses on companies’ fundamentals - such as earnings and cashflow growth - combined with a strict discipline around valuations. We are confident that this process will uncover interesting opportunities in the months and years to come.

1India’s economy follows China to reach rapid take off | Reuters
2IMF: India overtakes UK as the world's fifth-largest economy | World Economic Forum (weforum.org)
3India Aims to Spend $1.4 Trillion Building Infrastructure - Bloomberg
4Politics, Productivity & Population: Why The Chinese Economy Flew and India's Just Grew (forbes.com)

 

 FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS.

Capital at risk. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.

Risks specific to the Artemis SmartGARP Global Emerging Markets Equity Fund

  • Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
  • Currency risk: The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
  • Emerging markets risk: Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
  • China risk: The fund can invest in China A-shares (shares traded on Chinese stock exchanges in Renminbi). There is a risk that the fund may suffer difficulties or delays in enforcing its rights in these shares, including title and assurance of ownership.
  • Charges from capital risk: Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.

Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund.

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

For information on sustainability-related aspects of a fund, visit the relevant fund page on this website.

For information about Artemis’ fund structures and registration status, visit artemisfunds.com/fund-structures

Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.

Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit artemisfunds.com/third-party-data.

Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.


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