by Charles Roth, Thornburg Investment Management
India has implemented measures that combined should generate a surge in economic growth, corporate earnings, and double-digit annualized stock returns over the next decade.
When can a country's bluechip stocks be a bargain if they're trading at historically high forward earnings valuations after posting world-beating returns over the last two decades? Right now, if they're Indian, and your investment horizon is at least five years or, better still, up to a decade.
The dollar-denominated MSCI India Index has returned just shy of 400% over the last 20 years, but Morgan Stanley still expects India's stock market capitalization to about triple over the next 10 years to $6.1 trillion. That's the baseline; in a bullish scenario, the potential upside quadruples to $8.5 trillion, driven by eye-watering earnings growth and multiple expansion in the country's consumer and financials sectors.
India's economy and financial market are at an inflection point, driven by "digitization," as Morgan Stanley explains in a new, lengthy report. India's Digital Leap – The Multi-Trillion Dollar Opportunity describes the monumental impact that the convergence of a handful of legitimately transformative initiatives are starting to have on the country, and its economy, which the investment bank also expects to nearly triple in size over the next decade. That would lift India's nominal gross domestic product (GDP) to north of $6 trillion, and make it the world's third-largest.
Two policies unprecedented in scope are dove-tailing with the modernization of India's convoluted, antiquated tax system. Add the rapid spread of smart phones and a sharp fall in data costs, and India is poised to "leap-frog into the digital age."
The first step came in 2010, when the country set about to biometrically identify every one of its 1.3 billion people. It's nearly finished: 1.2 billion people have been registered with retina-scans or fingerprints. Then, in 2014, the government launched a financial inclusion program resulting in nearly all Indian households—around 285 million—obtaining bank accounts, which they can access remotely.
That's a key feature for India's roughly 800 million mobile users, and the 430 million now enjoying Internet access. Morgan Stanley expects the latter figure will more-than-double over the next decade, yet still comprise just 62% of the population. Smart phone penetration is growing even faster: from 300 million today to about 700 million forecast by 2020. Data costs, meanwhile, are plummeting after an infrastructure build-out and brutal price wars between India's telecom companies.
And in July this year, the government implemented "the single biggest tax reform undertaken by the country in 70 years of independence," as India's Economic Times has put it. The Goods and Services Tax (GST) essentially creates a "common market" that replaces thickets of cascading indirect central and state levies. While kinks will no doubt have to be ironed out, the GST facilitates cost-efficient inter-state commerce, which should increase tax compliance and therefore revenues. On the expenditure side, welfare payments are more efficient—made straight into recipients' bank accounts, reducing bureaucratic "leakages" and strengthening the social safety net.