Resilient India to outperform most global economies in FY24, says Client Associates

• India is less vulnerable to rising interest rates and higher bond yields across the globe.
• India’s macro profile is relatively stable compared to key developed and emerging market countries.
• The inflation management has been highly effective, with current and expected inflation for FY25 well below the 10-year average.
• Over a 5-year period, India has demonstrated compelling performance with an average rolling return of 8.9% and a Sharpe ratio of 1.29, indicating favourable risk-adjusted returns.
  

From being one of the many emerging markets, India today is a compelling destination for both foreign direct and portfolio investors. For the first time in many years, all cylinders of the economy are firing away. Client Associates, Largest Multi Family office both in terms of number of families and the size of assets, has done a deep dive into a multitude of factors that makes India a compelling investment case.

According to CA, India’s economy is expected to continue its strong growth trajectory, with real GDP growth projected to be higher than the long-term average in FY2024. India will outperform its growth trajectory of the last ten years.

India is one of the fastest-growing and most stable large economies in the world today. As per the report, the country’s economic growth is set to continue in FY2024, driven by strong domestic consumption, a young workforce, government’s thrust on infrastructure spending, and opportunities arising from the global supply chain shift. In contrast, other global economies are expected to witness sluggish growth.

The country is among a few large economies that are witnessing a positive real rate as inflation is below the short-term interest rates. High-frequency indicators such as credit growth, GST collections, services and manufacturing PMIs, UPI transactions, e-way Bills, air traffic, capacity utilisation, electricity production, IIP, and rabi-sowing indicate sustained recovery in domestic economic activities.

Rohit Sarin, Co-Founder, Client Associates said: “India’s burgeoning economy presents a compelling investment opportunity, offering a unique blend of growth potential and risk mitigation. With its dynamic market and expanding global footprint, India is poised to become a cornerstone of well-diversified portfolios. Our findings provide valuable insights for investors and stakeholders.”

The arguments are based on a few factors that are coming together to boost India’s real GDP growth. India has outperformed its other global counterparts, with a growth rate of 7.20% in FY’23, which is well above consensus estimates, on account of robust private consumption and better than expected industrial production as a result of monumental government capex and revival in private capex.

India’s 10-year bond yields are also largely in line with long-term averages, while yields for other large economies are trading well above historical averages. This suggests that India is less vulnerable to rising global interest rates. India’s macro profile is relatively stable compared to key developed and emerging market countries. The inflation management too has been highly effective, with current and expected inflation for FY25 well below the 10-year average. In contrast, expected inflation in FY24 for the US and Eurozone is pegged to be higher by 55.89% and 180.0%, respectively. The country’s favorable policies and infrastructure spending are further supporting economic growth.

These trends also have implications for investors and policymakers. Performance of Indian equities compared to other developed and emerging markets shows that India has emerged as a key player in both developed and emerging markets, underscoring its role as a strategic investment destination.

In assessing the diversification benefits within emerging markets, the analysis compares India to counterparts like China, Taiwan, South Korea, and Brazil. Over a 5-year period, India has demonstrated compelling performance with an average rolling return of 8.9% and a Sharpe ratio of 1.29, indicating favourable risk-adjusted returns.

The diversifier effect is evident as the Sharpe ratio of India, adjusted for correlation, surpasses that of the home markets for all analysed countries, implying diversification benefits for investors in each emerging market. Brazil showcases the most significant advantage, closely followed by China.

In conclusion, the report highlights India's role as a valuable diversifier within both developed and emerging markets, offering an appealing risk-return profile. Investors worldwide stand to gain notable diversification benefits by including Indian equities in their portfolios. Overall, Client Associates is optimistic about India’s economic outlook.