The relentless focus on the tech sector means you could be forgiven for thinking the US has been by far the top-performing stockmarket in the last few years – but it’s not.
While America has done extremely well, there are a handful of countries beating it. Most of these are small markets or special situations, but there are a couple of exceptions, of which India is the most notable. India has had an unusually good run since the pandemic, especially for foreign investors.
While India is a market that has frequently delivered high – but volatile – nominal returns, it’s also suffered from high inflation and persistent currency depreciation. In 1994, one pound bought around 50 rupees. Today, it’s around 105. As a result, returns for a British investor haven’t always been vastly better than the wider emerging-markets universe, as the chart shows for the last 20 years.
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However, Indian stocks have rocketed since 2020 and greater currency stability has let foreign investors share in most of those gains. The rupee has done okay against the wobbly pound, but even measured in a stronger currency – eg, the US dollar – the gains have been substantial. The MSCI India is up by 14% per year, including dividends, in dollar terms over three years.
Should you invest in India?
The bull case for India is very familiar by now. Economic reforms are unlocking faster growth, leaving it well placed to take advantage of its youthful demographics at a time when many developing and emerging economies are ageing.
India is now the world’s fifth-largest economy, with a GDP of around $4 trillion – close to overhauling Japan and Germany. The domestic market is huge, which is a crucial advantage if the world retreats from globalisation.
Private-sector businesses have been allowed to earn high returns from the rapid growth of the economy: that sounds like an obvious statement, but it is a very strong selling point for emerging-market investors who have been stung by China’s turn away from capitalism over the past decade.
It used to be said that foreign institutional investors (FIIs) had an outsize influence on the Indian market, but this looks like a domestically driven boom. India has done a good job of deepening its domestic capital markets, including the critical step of encouraging more individuals to put their money into mutual funds and stocks rather than gold and bank deposits. The obvious risk is that the market has risen so much, as Christoper Wood notes. The MSCI India trades on a price/earnings ratio of around 26 times trailing earnings and 22 times forecast earnings.
India has always tended to be a high-priced market because earnings have grown at a high pace (not least due to inflation), but valuations at these levels make me a little cautious. One has to worry a bit about how retail investors who have only really seen a bull market might react in a downturn. That said, if nothing serious goes wrong with the economy, India will be a growing share of global portfolios in the years ahead, even if there are setbacks.
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