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India: Growing
Leaps and Bonds February 2024

India, currently among the fastest-growing economies, is on

Economic Ascendance a trajectory to become the world’s third largest economy by
20271, surpassing Japan and Germany.
• India is projected to stand out as a pillar of
economic growth over the next few years by The nation’s lower correlation with developed markets,
the International Monetary Fund. coupled with an anticipated GDP growth of at least 6%2 over
the next five years, presents a compelling case for
increasing investment exposure to India. Historically, global
Strategic Opportunity investors have gained access predominantly through
• We see India as a large and investible Asian equities, with Indian stocks concluding 2023 on a record
market with unique domestic dynamics at eight-year winning streak. The inclusion of Indian bonds
play – and one that global investors should into the JPMorgan GBI-EM Global Diversified Index in June
look to get access to in portfolios. this year marks a significant milestone, providing a new
channel for global investment.

Optimizing Portfolios In this paper, we delve into the structural investment appeal
of India, assess the potential risks, and evaluate the breadth
• Indian assets reduce risk and add growth,
of opportunities available to portfolios seeking to leverage
momentum and diversification to global
the long-term strategic potential of an economy with over a
portfolios, our analysis shows.
billion people.

Mapping India's growth story to mega

India: The Growth Engine forces
8 The $3.4Tn3 Indian economy is propelled by several mega
forces, such as favorable demographics, a fragmented
global landscape, and increasing affluence, all of which are
catalyzing its rapid economic expansion. The growth is
6 particularly notable against the backdrop of otherwise
lukewarm global economic advancement. India is
anticipated to contribute an additional $400B annually to
GDP Growth %

the global economy in the forthcoming years. Currently

4
accounting for 16% of global growth, this figure is projected
by the IMF to rise to 18% within the next five years.

1,2,3 Source: IMF World Economic Outlook, January 2024

0
2022 2023 2024 2025
“ Inclusion of Indian government bonds in
JPMorgan's benchmark emerging market index
should boost debt capital inflows into India until
March 2025 as investors position for the upcoming
Developed Markets US
shift in the EM bond landscape.

”
Emerging Markets China
India World
Manjesh Verma
Source: IMF, World Economic Outlook, January 30, 2024. All reference to $ in this
Head of APAC Credit and Fixed Income Research
document refers to USD unless otherwise stated. Forecasts are based on estimates and
assumptions. There is no guarantee that they will be achieved.
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Favorable demographics India’s working age population

share set to overtake China
India overtook China as the world’s most populous
nation in 2023.4 The nation is home to a young and 75%
growing workforce; approximately 65% of India’s
population is under the age of thirty-five, with half of 70%
them below twenty-five, according to latest United
Nations data from April 2023.5 65%

Share
This demographic profile is in stark contrast to several
other major economies, where labor growth is on the 60%
decline as the demographic dividend that fueled many
EM countries begins to wane. According to our Emerging 55%
Markets Fixed Income analysts, the coming decade is
more likely to witness a continuous decline in EM growth 50%
potential rather than experience a favorable reversal.
Against this backdrop, we will likely continue to see an
China China (forecast)
evolution of the EM trade from the broad to the granular,
where India stands out as the bright spot. Favorable India India (forecast)
demographics are not only a source of cheap labor, but Source: BlackRock Investment Institute with data from World Population Review,
high income could also create wealth and a new as of October 2023. Forecasts are based on estimates and assumptions. There is
generation of consumers for businesses. no guarantee that they will be achieved.

Benefitting from a fragmented global Rewiring of Supply Chains

landscape 45
Geopolitical tensions have ushered in a new era of
40
competing economic blocs, signaling a departure from
35
Share of total imports (%)

the post-Cold War period of steadily increasing

globalization.
30
The Blackrock Investment Institute (BII) sees countries
25
favoring national security and resilience over economic
efficiency, accelerating the rewiring of supply chains. As 20
competing blocs firm up, multi-aligned countries are
15
likely to grow in power and influence. A surge of
investments into tech, energy, infrastructure, and 10
defense could create opportunities.
5
BII puts India among a cohort of countries with critical
resources and key supply chain inputs. These nations are
0
1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

2023

expected to navigate their alignments based on national

interests – further shaping supply chains and industrial
policies. China EM ex. China

4, 5 Source: World Population Review, October 31, 2023. Source: BlackRock Investment, IMF, LSEG Datastream as of December 31, 2023.
Note: Seasonally adjusted data.

“
Despite concerns over Indian equities’ lofty valuations, investors are becoming more
convinced of India’s longer term growth potential. In addition, the inflation gap with the
US and other DM countries has narrowed; the rupee has been fairly stable versus other
EM currencies, and India’s FX reserves look very healthy – currently around US$600B.

Thomas Taw
”
Head of APAC iShares Investment Strategy

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Foreign inflows set to continue

Global ETP Flows into India
Indian equities have seen demand in recent years,
supported by domestic appetite. Last year alone saw the
8,000
addition of over 20 million new investment accounts, as
6,801 reported by the Association of Mutual Funds in India.6 In
addition, domestic equity funds have enjoyed a
remarkable 35-month inflow streak.
6,000
Global investors, who had previously retreated, made a
notable return last year. The resurgence is attributed to
strategic rewiring of global supply chains combined with
In US$ million

4,000 favorable demographics, which have made the country a

preferred single-country allocation for investors. Global
ETP flows into Indian equity exposures soared to a record
$6.8B7 in 2023 compared with outflows in 2022, and a
2,000
substantial injection of over $12B from foreign
institutional investors into Indian stocks.8
India’s weighting in the widely followed MSCI Emerging
- Markets Index has doubled to 17% between December
2019 to December 2023, according to MSCI. Besides, in
the past two decades, India’s economic growth and the
value of its stock market have been closely linked, with
(2,000) GDP and market capitalization climbing in tandem from
2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

$500B to $3.4Tn, government data shows.

The upcoming inclusion of Indian government bonds
Source: BlackRock as of January 31, 2024. into JPMorgan GBI-EM global index suite starting June
28 is poised to further gather billions in capital flows. The
India government bond (IGB) market currently exceeds
$1Tn9 in size and is the second largest EM bond market
India bonds: Diversification opportunity
after China. Despite its size, foreign ownership in the
800 650 asset class is one of the lowest at approximately 2%10,
primarily due to historically limited access for
600 international investors.
600
India-US 10y yield differential (bps)

IGBs offer diversification benefits by virtue of low

550
400 correlation against other major fixed income markets,
Foreign flow in US$ million

and have presented lucrative risk-adjusted returns

500
200 relative to broad EM local currency exposures. The bonds
have offered a 4.4%11 annualized return over five years
450
0 compared with 3.5% for Chinese bonds and 1.2% from
400 EM local currency bonds. There is an estimated $210B to
$250B12 of assets benchmarked against the GBI-EM
-200
350 index family, so the JPM inclusion is expected to bring in
$21-25B of foreign inflows into the asset class, we
-400
300 estimate. Street estimates also indicate possibility for
higher inflows to come through should other index
-600 250 providers such as Bloomberg13, which in January issued
a consultation on the inclusion of the bonds into its EM
-800 200 local currency index, follow suit.
2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

6 Source: Association of Mutual Funds of India as of Jan. 14, 2024. 7 Source: BlackRock as
of Dec. 31, 2023. 8 Source: Centre for Monitoring of Indian Economy as of Dec. 31, 2023.
Net Foreign Investments in India Debt (USD) 9. Source: BlackRock, Reserve Bank of India, Jan . 31, 2024, 10, 11 Source: : Bloomberg,
as of Jan. 31, 2024. 12 Source: JPMorgan as of Dec. 31, 2023. 13, Source: Bloomberg as
India - US 10y yield differential (bps) of Jan. 9, 2024.Past performance is not a reliable indicator of current or future results.
India represents India FAR bonds (J.P. Morgan India Government Fully Accessible Route
Source: Bloomberg as of January 31, 2024. (FAR) Bonds Index). Index performance returns do not reflect any management fees,
transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an
index.

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Is Valuation a Concern? India is the Most Expensive Market

Indian equities are currently valued at 21.5 times

INDIA
forward earnings14, noticeably above a 10-year average
of 18.8 times. This positions them among the most USA
expensive globally. However, the valuation is not AUSTRALIA
without justification, as it reflects stronger earnings TAIWAN
growth and a history of robust returns that Indian JAPAN
markets have consistently delivered. CANADA
Over the past two decades, India’s leading stock indices FRANCE
have seen an average of 13% annualized returns in MALAYSIA
USD terms15, almost double the 7% offered by the MSCI MEXICO
EM index and well over other major equity
HONG KONG
markets. India also benefits from the highest corporate
SINGAPORE
Return on Equity across Asia. Analyst forecasts suggest
that earnings per share for India’s top 50 companies GERMANY
could grow by 14% and 16% in 2024 and 202516, S. KOREA
respectively. UK
Yet, with an election year on the horizon in 2024, S. AFRICA
macroeconomic and fiscal concerns may arise, CHINA
potentially creating some volatility despite opinion polls BRAZIL
largely predicting continuity. Historical market
0 5 10 15 20 25
performance shows the Nifty 50 tends to rise in the six
months prior to and following federal elections. We
P/E Ratio
remain sanguine.
12-month Forward P/E
Government investments in infrastructure and 10-year Average P/E
manufacturing have been significant, with record capex
allocations for the year ending March 31 2025 to reach Source: BlackRock, Investment Institute, LSEG Datastream, MSCI as of
January 19, 2024.
11.1Tn rupees17, up 11% from the previous year and
exceeding 3% of GDP.
Election Effect on Indian Stocks
Animal spirits from the private sector need to take over
if the government’s propensity to spend post-election
wanes. Recent data from the Centre for Monitoring 50%
Indian Economy indicates that a rebound in private
sector capital investment picked up in the last three 40%
months of 2023, after two quarterly drops. However,
new investment proposals are still below levels seen last 30%
year. This combination of earnings growth and quality 21%
has helped India double its share of the MSCI Emerging
20%
Markets ex-China Index over the past six years. 14%

We continue to see India as a large, increasingly liquid, 10%

and investible Asian market with unique domestic 3%
1%
dynamics at play – and one that global investors should 0%
look to get access to in portfolios.
-10%

-20%
6-Months 1-Month 1-Month After 6-Months
Before Before After

23-May-19 16-May-14 16-May-09

14: Source: BlackRock Investment Institute, LSEG Data Stream, MSCI as of
Jan. 19, 2024. 15 Source: National Stock Exchange of India, MSCI as of Dec. 13-May-04 6-Oct-99 Average
31, 2023. 16: Source: Bloomberg analysts' consensus as of Jan. 31, 2024,
17 Source: India Budget estimates as of Feb. 1, 2024. Source: National Stock Exchange of India, BSE as of December 31, 2023.

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Sizing the India opportunity in portfolios

While we have presented the case to increase exposure to In each scenario, Indian equities prove their mettle.
India over the long-term, we have gone a step further to Drawdowns for a portfolio which included Indian equities
analyze the impact of Indian exposures on broad portfolios. appears below that of pure global allocation.
We tested the resilience of Indian equities against three
main scenarios – a slide in global stocks, a resurgence in US
rates and a strengthening US dollar.

Resilience against global risk

2

-2

-4

-6
P & L, %

-8

-10

-12
MSCI Sensex MSCI Nifty 50 MSCI Sensex MSCI Nifty 50 MSCI Sensex MSCI Nifty 50
ACWI India ACWI India ACWI India
Index Index Index
Stock Market Down Global US Rates Back Up Strengthening of US Dollar

Equity Rates Spreads FX Inflation Volatility Alternatives Other Total

While overall portfolio risk reduced with the inclusion of These characteristics are turning Indian equities in a
Indian equities, our portfolio analysis also revealed compelling portfolio opportunity, in our view.
additional benefits. We found Indian equities added growth,
momentum and diversification to portfolios, all important
qualities at a time when growth is scarce.

Higher Growth and Momentum

Leverage

Growth

Dividend Yield

Profitability

Value

Momentum

Volatility

Size

-1.00 -0.50 0.00 0.50 1.00 1.50 2.00

Z-score
Nifty 50 MSCI India Sensex MSCI ACWI Index

Source: Source: BlackRock, Aladdin ®. Data as at January 31 2024. Ex-Ante Tracking Error sourced from Aladdin using 6 years’ worth of monthly data with a 3-year half-life as
of December 29 2023.

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IMPORTANT INFORMATION
Capital at risk: The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may
not get back the amount originally invested. All investments involve risks and may lose value. Past performance is not a reliable
indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be
particularly marked in the case of a higher volatility product or strategy and the value of an investment may fall suddenly and
substantially. Levels and basis of taxation may change from time to time.

CONTRIBUTORS

Thomas Taw
Andy Ng
Narayanan Somasundaram
Gladys Liu
Wee Lynn Low
Neil Broadbent
Darryl Yee

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