A surge in retail investors, increased IPO activity and strong foreign inflows have all been a boon for India’s equity market.
The MSCI India index has been on a stellar run over the past year, outpacing even the S&P 500 index in US dollar terms – until the most recent correction.
Indian stocks have fallen into correction territory, down 10% from their highs set in late September after a bumpy earnings season.
But for Shekhar Sambhshivan, manager of the Invesco India Equity fund, a market correction comes as no surprise.
He is confident that zooming out to a longer time horizon, some Indian companies will continue to compound their earnings and justify what some managers label as ‘outrageous’ valuations.
He said: “The beauty of the Indian market is that if you look at the last 20 years, there have been various political formations, and ups and downs in the economy. But if you look at the profitability of many companies, Indian entrepreneurship has done an amazing job over the last 15 to 20 years through different cycles.”
“That’s where we are fully confident on: that delivery will happen in the next 15 to 20 years.”
Even if the market correction in India does continue, Sambhshivan said that it is likely that the very best companies will continue to compound their profit pools.
However, investors need to be selective, he warned. “There has to be huge differentiation between one company to other companies within each segment,” he said.
“Not all companies will do well; there will be some that will go belly up after a few years, but some will do exceedingly well.”
An industry with tailwinds
One areas of the market Sambhshivan remains optimistic about is within the supply chain for the nation’s defence, power and railway industries.
“We suddenly figured out that India is significantly under invested in the equipment supply chain of defence, power, and railway industries,” he said.
He singled out transformers used to electrify railways as one example where India is “significantly underinvested”.
India used to rely a lot on imports, but Sambhshivan believes the government’s push for local manufacturing is creating a lot of new opportunities domestically.
It has been 10 years since Prime Minister Modi started the ‘Make in India’ initiative to promote India as the most preferred global manufacturing destination.
“If you look at the order books of big multinational companies, they are all full,” Sambhshivan said. “So much so that they are unable to meet the demand with the current capacity and whatever capex they are doing for next couple of years.”
But despite a positive backdrop for a sector, he stressed the importance of being selective when deciding whether or not to add or trim companies in a market with high valuations.
He said: “If the segment is growing well, and if we find a company within the segment which has a good growth, obviously it will command decent pricing power – stay with it.”
“If a segment is not growing, even the best of the companies will struggle because they are not finding pricing.”
“But if the segment is doing well and the company is losing market share in that, that’s going to be very difficult – if their valuation is expensive, I can assure you it will come down.”
As India’s stock market continues to rise, emerging markets fund managers are starting to have to pay more attention to a country they could previously afford to ignore.
If not for the most recent correction, a surge in Chinese stocks and continued strength results from Taiwan’s Semiconductor Manufacturing Company, India was on track to become the largest region in the MSCI Emerging Markets index.
It currently accounts for 18.6% of the widely used benchmark.
