Portfolio Manager Josh Rubin reviews risks associated with investing in India, such as valuation disconnects, currency fragility and the urban/rural imbalance.
Spotlight on India: High Valuations and Other Risks to Watch
Adam Sparkman: Welcome to this quarter’s emerging markets country spotlight. Today we are joined by Thornburg portfolio manager Josh Rubin, who will shed light on the thriving market of Indian equities. India is known for its vibrant economy, diverse sectors and robust growth potential. The country recently surpassed China as the most populous in the world, making it an attractive destination for investors looking to capitalize on its dynamic market. In recent years, India has witnessed a transformative wave of economic reforms, coupled with a thriving entrepreneurial spirit, paving the way for interesting investment prospects. Indian equities offer a wide range of sectors that present compelling opportunities for investors seeking long term growth from technology and consumer goods to health care and housing. Let’s dive in and explore the world of investment opportunities in India.
I think we would be remiss, especially when talking about emerging markets, if we didn’t at least hit on the risks. How does this play into your mindset as an active investor in India?
Josh Rubin: It’s interesting. One thing that’s actually happened over the last several years, even as investors have increased their conviction investing in India, the allocations from global investors to India have been declining.
And a big reason for that is valuations. If we think back to 2016-2017 time period, India’s P/E multiple was around 17 times and that was pretty similar to Mexico or Indonesia or some other countries back then. China, Brazil, Korea, maybe they traded around a low double digit 10 to 13 times P/E multiple. But today
India trades at 22 times and most of the rest of emerging markets are trading around ten times earnings again.
So, there’s this very big valuation disconnect, which reflects just how bullish people are on India. So, part one, whether you think about it holistically or at the individual security level, valuation really matters. And balancing the starting point of valuation with your confidence and earnings growth is just extremely important. A second thing that is different in India compared to China is currency stability. If we think of the Chinese economic miracle from call it 2000 through 2016 or 17, because China maintains such a large trade surplus, its currency was always quite stable. But India is not an exporter of many things, and the result is the currency tends to depreciate by two or 3% a year. And some other elements of it sort of give its currency a little more fragility.
So being aware about whether the macro dynamics are supportive of the rupee or if there’s greater currency risk does still matter. It’s interesting in dollar terms, over the last decade, China has grown faster than India. And the difference is really the currency right there. Even though India has had a more dynamic underlying economy. I think the final part is what we talked about earlier in terms of the rural versus urban divide, a very important part of the Indian growth story going forward is going to be that the gains, the economic gains translate to everyone in the economy and the way that we’ve seen the recovery from COVID. It has been a lot softer in the countryside. So, we want to see momentum in wage growth and some other economic indicators outside of the cities because that’s really important to bringing another billion consumers into driving the Indian economy today. The Indian economy is very strong, but it’s really driven by that upper part of the pyramid. And we need to see some momentum at the lower end.
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