Praveen Jagwani is chief executive officer at UTI International, a Singapore-based manager of Indian assets.
No force on earth can stop an idea whose time has come, wrote the French essayist Victor Hugo in 1852, a maxim that could easily be applied today to India's quiet emergence on the world stage, especially when it comes to its economy.
To the surprise of many, India's stock market is on track to be the best performing market this year. Never any good at identifying turning points in a country's fortunes, what the pundits have missed about India is that it stepped into a higher orbit. And that bodes extremely well for Indian equities.
India started its journey of economic liberalization in 1992. While the country has seen a variety of governments and prime ministers since then, the Indian economy has grown consistently by an average of 6.5%.
The predictability of this growth rate is what sets India apart. The magic range of 6%-7% growth has withstood all kinds of global and domestic crises over these three decades. In 2020, India became a bigger economy than France and the U.K. combined, a momentous event that has been overshadowed by the COVID pandemic.
Over the past few years, investment gurus have been blinded by the glitz and glamour of technology companies, be they American or Chinese. Beguiled by these sexy, disruptive business models, such gurus have studiously ignored the old-fashioned yet robust consumption potency of India's youthful middle class.
Part of the reason for this is that investors are forever in the hunt for markets that are going cheap because who does not love a bargain? On that metric, India has never attracted bargain hunters, with its valuations always higher than that of China.
On average, over the past decade, India has traded at a 36% premium to the MSCI Emerging Market Index. As a consequence, a majority of global investors, in their single-minded pursuit of the cheap, have shunned India. Had these investors been right, they would have been handsomely rewarded for their decision to avoid Indian equities.
But the real story is that India has unfailingly delivered higher annualized returns than the Emerging Markets Index across all time periods. India has also performed better than China, for the most part. Cumulatively, over the past 10 years, in dollar terms, MSCI India has returned 124% as against 66% for the Emerging Markets Index, and 106% for the CSI 300, which includes the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges.
But the main reason the pundits have been consistently wrong about India is that they have failed to grasp the psyche of its people.
The desire of the average person to improve their standard of living is a powerful driver of industrious behavior. This is at the heart of India's consumption juggernaut. And it is gathering momentum as the country's middle class spends increasingly on appliances, scooters, sneakers, entertainment and consumes more nutritious, value-added food.
Historically, emerging countries typically enter a cycle of super-growth when their income per capita crosses the $2,000 mark. With India just racing past $2,100, this augurs well for its stock markets.
I argue that there are four key reasons for this conviction. First, the power of India's young and growing, working-consuming-investing middle class.
Second, with Indian households and companies carrying much less debt than their global peers, the country is also on the cusp of a technology-led credit boom.
Third, Prime Minister Narendra Modi's reform agenda has steadily demolished structural inefficiencies in the economy, thereby creating a launchpad for accelerated growth.
Finally, what I call the geopolitical tailwind - global nervousness about Beijing that is forcing corporations and governments to reduce dependence on China and seek opportunities in India.
Add to this the fact that Beijing is not prioritizing growth as it once did. Instead, President Xi Jinping is focused on trying to rein in unbridled capitalism and reduce the economy's dependence on debt. The crackdown on its tech companies and industry chieftains has also rattled global investors.
While the "common prosperity" agenda is laudable, it will mean that China is unlikely to be the engine of global growth that it was after the 2008 financial crisis.
So who is going to power the next round of global recovery? At the moment, all signs point to India. India has the scale, stability, institutionalized frameworks of governance and is a liberal democracy to boot. It has demonstrated that it has the aspiration and the resolve to counterbalance China in the Indo-Pacific.
As a result, both foreign direct investments as well as portfolio investments have been pouring into India at an unprecedented rate. In 2020, India attracted $64 billion in foreign direct investment, the fifth-largest inflows in the world, according to the U.N.'s World Investment Report 2021.
No growth path is linear and Indian equities like those of any emerging market will remain volatile as the world wrestles with the withdrawal pangs from years of easy money. But when the dust settles, India will reward those who have remained invested for the three to five-year time horizon.
In summary, China seems to be abdicating its spot as the world's reliable growth engine, and India is ready to assume the mantle as it enters a rising earnings cycle predicated on various domestic and global drivers.
Such a cycle is characterized by higher shareholder returns, and investors would be well-advised to increase their exposure to Indian equities even though they may look expensive. Buying smart, however, is better than buying cheap.