How China factors will be playing out in India

Jonathan Garner, Chief Asia & Emerging Market Strategist & Chairman of Asset Allocation, Morgan Stanley, says “confident about both government and private sector growth in India. The private sector has been quite important in delivering even on key large ticket elements of infrastructure but it is that structural improvement in infrastructure across the power supply, roads, ports, including the rapidity in which you can contain turnaround in imports. All of this is very important for inward manufacturing investment to really get going.”

Since you are making a case that what has happened to China in the past will happen to India in coming decade, in coming years, now what happened to China was the following — big expansion in the real estate market, big expansion in per capita income, strong demand for commodity and a huge jump in terms of consumer spending. Do you see all the so-called X or China factors playing out in India both in terms of per capita, commodity demand and also urban consumption demand?
Yes, there is not going to be an exact mapping, but in relation to GDP per capita growth, overall economic growth can probably quite easily compound at 7% plus per annum and the leveraging up of the household sector’s balance sheets as interest rates are much more , let us say, within a range if not down from levels that we have seen historically. So, yes, certain of those trends can continue for a long way to go for India.

You have explicitly mentioned the strong capex cycle in India. Where are you confident of capex in India? Government capex, private sector capex, where are you more confident of?
Well, both frankly. The private sector has been quite important in delivering even on key large ticket elements of infrastructure but it is that structural improvement in infrastructure across the power supply, roads, ports, including the rapidity in which you can contain turnaround in imports. All of this is very important for inward manufacturing investment to really get going.

Among domestic versus global facing sectors in India, I would like to bracket financials and capex in domestic followed by consumption, metals, IT and to some extent pharma as outward looking sectors. Do you see the growth being dominated by inward and domestic dominated sectors?
The pharma sector has been somewhat challenged in recent years. I am not an expert on it, but certainly the IT outsourcing sector is an interesting one because we now have the AI thematic ongoing. So, we want to monitor that very closely for what it means for future earning streams there.

But the core of our interest in India is about the domestic demand story and the development of domestic consumer markets, industrialisation, urbanisation, real estate, construction, financial services, the development of that. If you look at, say, things like life insurance markets or mortgage, are still very low relative to the levels of GDP that we have in some of the more advanced parts of Asia economically.

What role do you think this kind of high inflationary scenario will have on a market like India because in India, inflation has been notoriously high, especially in the case of food grains and vegetable prices. I am sure you have read about what is happening to tomato prices here. What role do you think inflation and rate dynamics will play in a country like India?
I touched on that earlier in the answer to the question about risks when I mentioned climate change and obviously from that food security is an issue potentially, but not just for India, it is an issue globally. Obviously, the conflict in Ukraine has had an effect there on food prices and likely continues to do so.

I group that as one of the risks to the scenario. But I do not think it is an overwhelming risk and it is not likely to prompt the RBI into anything like the almost emergency tightening of monetary policy that we are seeing in some of the advanced economies.

If you have to share a moot point based on the client engagements you have had and the number of clients you associate and the number of clients you deal with, how many of your clients right now have ignored India and are feeling FOMO?
You would have to break it down into two buckets. Global managers who can invest anywhere in the world in equities still hold very low weightings in India. They used to hold considerable weightings in China, but they have come down to approximately the same level as India now and those weightings are much lower than they hold in leading semiconductor stocks in Korea and Taiwan.

That group of global investors have yet to engage with the market in India. If you look at emerging market specialists, it is very different. They hold quite large weightings in India, and they are very engaged on the stock and sector side and yes, so that is a very different situation.

When a market goes through what could be called as a multi-year, multi and decadal strong earnings growth, shouldn’t one compare the current valuations with the historical valuations because more often than not, fund managers and brokerages have argued for historical benchmarks to judge the future.
You have to be careful about that, particularly when you are getting up this breakout in relative earnings per share growth. If you were to look at that India valuation of around 20 times one year forward PE for MSCI India, that is a rich valuation to history.

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