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India - the Fastest Growing, and the Most Expensive 💸


India Is the Fastest Growing Economy

India is likely to be the fastest-growing Asian economy in the Asian region in 2022-23, with India's GDP growth averaging 7% during this period - the highest among large economies.

This high-growth situation comes in at a time when global economies are being pushed into a recession. Clearly, given the growth, it makes sense for the world to stay invested in India.

But What about Valuations?

There’s something called valuations too! And if India is already valued too high, there wouldn't be much upside left. In fact, there could even be downside risk.

We assess valuation on two counts:

  1. At 20x PE, India is one of the most expensive markets globally, second only after Nasdaq. While valuations for the world have come off sharply over the last few months, India hasn't seen a material de-rating yet.

  2. Compared to the MSCI Emerging Market Index, India has historically traded at a premium of 60%. However, it is currently trading at a 130% premium.

And then there’s another indicator, from the Oracle of Omaha himself - Warren Buffet.

The Buffet Indicator is a simple way to measure if the markets of a country are overvalued. It’s basically the market capitalisation of all the listed companies divided by the GDP of that particular nation. If the ratio comes above 100%, the market is overvalued.

Guess where India stands? 107%. To put things in perspective, the market value to GDP was 103% before the 2008 stock market meltdown.

Why Valuations Matter

No doubt on India being the fastest economy, and that relative growth continues to be the highest as the world dips further into trouble. However, look at it from a global investor’s theoretical perspective:

  1. As a global investor, you put your money into India, and corporate earnings growth of 10% is achieved

  2. However, there is no valuation re-rating since the market is already expensive, and is factoring in most of that growth

  3. After a year, you make 10% and you exit the Indian markets. Here, you want to convert your INR (principal plus gains) back to US$. But the INR has depreciated against the US$ by 10%. When you take your money back, you’ve made 0%.

Wouldn't the investor just prefer investing in US government bonds instead, which will see an increase in coupon rates or accrued interest since the Fed is hiking rates?

Our Take

India being the fastest growing economy alone isn't enough a reason to drive the markets. Valuations being too high act as a resistance, and so do global economic factors. Given that the tide on the latter isn't looking too great, we’d be positive but still cautious on the markets at this time.

We’d like to ride the India growth story, but by only buying into the markets at reasonable prices, that is, when they see dips.

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