The global stock markets have two bulls – the c.$55 trillion US market and the c.$5.5 trillion Indian stock market. For participating in both these markets, you pay 22 dollars for one dollar of earnings. This sets these two markets apart from the UK, Europe, and China markets that are trading at 11.8, 13.8, and 9.3 times their earnings respectively.
The two bulls are the “US Exceptionalism” and the “Exceptional India”.
Figure 1. Valuation of key global markets (Source: Bloomberg)
But investing is not about finesse and nuances of English language. Its about buying low and selling high. Paying 22 times earnings doesn’t feel like buying ‘low’.
Are we paying for growth?
- Earnings growth rate – The earnings of companies in MSCI India Index are expected to grow at a mid-teens rate next year and low teens the year after. While the earnings of companies in the S&P 500 Index are expected to grow at low teens rate over the next couple of years. It is interesting to note that India has been growing earnings at a mid-teens rate since the end of the Covid-19 pandemic while US has seen only about a 4% annualised earnings growth in the same period. Other regions are projected to have low earnings growth.US earnings growth expectation is baking in a lot of optimism, while for India it seems like a continuation.
- GDP growth rate – India’s real GDP is expected to grow at 6%+ over the next couple of years while the US GDP is expected to grow less than 2%.
This poses an interesting question that if an economy is expected to grow only 1-2% then how will 500 of its largest businesses grow their earnings at 11-12%?
Figure 3. Real GDP growth (Source: Bloomberg, Morgan Stanley)- Source of earnings growth
In the US, the key expectations are that Artificial Intelligence investments will finally start yielding results and improve productivity in the wider economy while a revival of manufacturing will create more jobs. Analysts are also expecting a reduction in costs due to lower energy bills, lower taxes and reduced regulatory burden.
In India, growth is more broad-based. The country went through painful reforms and deleveraging cycle over the last few years and the government spending has been focussed on building infrastructure and public utilities and to incentivise manufacturing and import substitution. The next few years will see a positive multiplier effect from these reforms and investments. The themes that are in play in India are:
- credit growth and financialization of savings
- consumption
- premiumisation
- manufacturing and capital goods
- defence and aerospace
- real estate
While both countries seem to have multiple drivers for earnings growth, given that technology companies constitute 40% of S&P500, the bet seems rather concentrated. In India, one gets more shots at the target.
Should investors buy two bull markets?
India is largely uncorrelated from the four most critical issues facing the world today:
- Geopolitics – India is largely insulated from geopolitical hotbeds of Russia-Ukraine, Hamas-Israel, China-Taiwan
▪ Energy transition – India is embracing renewable energy as its cheaper, reduces import bill, supports currency
▪ AI’s impact on skilled labour – this is a tailwind for India
▪ Ageing – India has median age of the population at 29 years; there are almost half a billion children in India!
Therefore, one can diversify their US exposure by adding India exposure to the portfolio as they are largely uncorrelated.
Capital Allocation
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” — George Soros
Assuming we are convinced of “US Exceptionalism” and “Exceptional India” lets put our money to work. Most allocators look to MSCI Indices like MSCI All Country World Index (MSCI ACWI) for ‘guidance’. The MSCI ACWI ‘guides’ us that for every $100, we should allocate as per below:
- US – $65
- Europe/UK – $15
- China – $2
- India – $2!!
The only way you stand a chance at winning a lottery is to buy the lottery ticket. Investors will not benefit from the returns of the Indian market if they don’t allocate capital to it!
Conclusion
There is a lot of cheer in the capital markets about “US Exceptionalism” despite the US market trading at lofty multiples. Analysts are outdoing each other over how ‘this time it is different’. There is an equally if not more powerful case to be made for investing in India. And yet in my conversations with family offices, they have none or little allocation to India.
When it’s time to write the cheque, investors are allocating $65 to a concentrated, high-valuation US bet, $15 to a no-growth Europe/UK bet and less than $2 for a high return opportunity that is offered by India.
“In investing, what is comfortable is rarely profitable” — Robert Arnott
“Be fearful when others are greedy and be greedy only when others are fearful” — Warren Buffett
Sachee Trivedi
Founder & CIO
Trident Capital Investments
12/12/24