Many global investors have been betting big on emerging markets again.
Looking at the shape of developed markets, and the multiple opportunities in emerging markets, many are expecting emerging markets to not only outperform, but also get a higher share of allocation over the next decade.
According to Goldman Sachs, the share of emerging markets is likely to go up from 26% right now, to 35% by 2030. And India’s market cap is projected to go from 3% of global market cap right now to 5% by 2030.
India is increasingly becoming the most favoured emerging economy, led by several factors:
A steady government since the last decade
Fiscal policy with a long term growth orientation
Policy initiatives have been aggressive in the areas of infrastructure, manufacturing, and digitisation
Demographics in the form of a large and young population ensure both availability of a workforce, and fuel for growth in consumption
Geopolitical advantages with the world fighting it out with China, and finding a viable and scalable alternative in India
The preference differential emerges not only from India’s advantages, but also from the worries elsewhere. China has an ageing population and is engaged in trade wars with the West, South Korea will soon stop being called emerging and will classify as developed, Taiwan has its own issues with China, and we all know what Russia did.
Taiwan and South Korea are still emerging as strong contenders. However, investments there have a heavy sector skew - technology and semiconductors in the case of Taiwan, and entertainment and cosmetics in the case of South Korea. India being a more well-rounded play scores points over these two.
With potential for sustained economic growth of 7% over the next decade, India is likely to emerge as the fastest growing large economy in the world. And if the economy grows at 7%, corporate earnings have the potential to deliver 2x that growth. No wonder India’s valuations are at a steep premium to developed markets and other emerging markets.
The next time someone tells you India’s valuations are stretched, think about how there is potential for valuations to remain high for both emerging markets, and especially India, given sustained long term high growth.
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