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The best market in the world on a 10-year view

Mary Manning
Thursday, March 08, 2018

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In the next 10 years India is going to become a global economic powerhouse. This bodes very well for the Indian equity market. Consider the following:


India is becoming too big to ignore. India is currently the 3rd largest economy in the world in PPP terms after China and the United States. Most Australian investors have exposure to US markets and an increasing number have exposure to China, either directly or indirectly. But how many have exposure to India? Very few.  


India has one of the best demographic profiles in the world. India currently accounts for approximately 18% of the world’s population and will overtake China as the world’s most populous country by 2030. In addition to the sheer size of the Indian population, the demographic distribution is very attractive. Approximately 65% of India’s 1.25 billion people are under the age of 35. This translates into a huge and rising middle class which will drive sectors like consumer and financials.


India’s GDP growth in the last quarter was 7.2%. This is more than 2.5 times higher than Australian GDP growth and significantly higher than average GDP growth in Asia and other emerging markets. The good news is that this high GDP growth is translating into earnings growth. The average EPS growth expected for the SENSEX Index in the next fiscal year is 25%. This is 5 times higher than the rate of growth expected for the ASX 200.

Since Australia is a low growth country and has been for some time, many investors have forgotten the power of compounding growth as a driver for stock returns. Consider the following example: an Australian company and an Indian company both have $1 of EPS today and are both trading at 10x PE. The domestic company is growing at 3% per year and the Indian company is growing at 25% year. In 5 years, the Australian company will have $1.16 of EPS but the Indian company will have a whopping $3.05 of EPS. If there is no multiple expansion or contraction for either company, the Indian stock will have outperformed the domestic stock by 163% over 5 years. This compounding growth effect is why we love high growth companies in India.   


In the last 2 years, Prime Minister Modi has devised and executed an incredible number of major policy initiatives. These include: demonetization, implementation of the GST, a state owned bank recapitalization, Housing for All, Make in India and the Mega Road Plan (Bharatmala).

The macroeconomic implications of these policies have long term implications, particularly the GST which will drive productivity gains for years to come. Given current state election outcomes and his approval rating, Modi is on track to return to power in the 2019 General Election in India. We look forward to seeing what he can accomplish in a second term.


This is a common pushback to the bull case for India. Yes, India is a high PE market but, as discussed above, it is also a high growth market. A Price to Earnings Growth ratio, or PEG ratio, is valuation metric that incorporates growth. The PE of the SENSEX is 18x but EPS growth is 25% for a PEG ratio of 0.7x. In Australia, the PE of the ASX 200 is lower at 15x but growth is way lower at 5% so the PEG ratio is approximately 3x. On this metric, India is downright cheap!


Ellerston Asian Investments (EAI) is overweight India within our overall Asia portfolio and has been since inception. A few of the stocks we like are Larsen & Toubro (the largest infrastructure company in India), Maruti Suzuki (the largest car company in India), HDFC (the dominant housing finance company), Hindustan Unilever (consumer staples) and Mahindra & Mahindra (tractors, a play on growth in rural India).

Published: Thursday, March 08, 2018

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