Is India Set for a Repeat of its Last Decade's Success?

Kotak Insights | Date 17/08/2024

In September 1999, a report was published on what stock returns investors could expect from the US market for the coming few decades.

The idea was to address the concerns regarding the Social Security office's assumption of a 7% real return for stocks over the long term.

In a nutshell, the situation was something like this –

1. High stock valuations relative to benchmarks.
2. Projected slower economic growth in the future.

The report went on to conclude that the 7% expected return assumption was inconsistent with the stock market valuation at the time and the slow projected GDP growth rate.

Even though Rs 1 lakh invested would have multiplied your money, adjusted for inflation, the stock market returned less in the past two decades vs the expected return of 7%. This was the case for US markets.

The situation in India is pretty similar right now, with the only exception being the country’s upward trajectory of economic growth.

To be honest, we are at the crossroads between historically high inflation and stock valuations, and Indian investors do realise it won’t be smooth sailing from here on.

Even though we can’t predict the future, let’s see what it will take to have a repeat of the past decade of Indian stock market performance.

2014 to 2024 – Exceptional Decade for India

Even accounting for the COVID-19 crash, the BSE Sensex and NSE Nifty have outperformed major stock market indices worldwide over the past decade.

Indian Equities Outperform

Returns from 1 August 2014 to 1 August 2024

Source: Google

You see, for almost 200 years, the British plundered India and drained resources worth trillions from the country during their rule. The country has rebuilt itself since then to become the fifth-largest economy and one of the most powerful countries in the world.

One sector that has played a crucial role over the past decade is manufacturing. In fact, manufacturing will take India to new heights. It continues to be crucial for the economic success of 20th-century giants.

China is a prime example of this phenomenon. Since opening its economy, China has experienced an astonishing transformation that has left economists in awe.

From 1979 to 2018, China's GDP grew at an average rate of 9.5% annually, establishing the country as the world's manufacturing hub and making it indispensable to Western superpowers.

But everything changed during the pandemic when the coronavirus wreaked havoc across the globe. And it was then that other countries realised the dangers of over-reliance on one country, China in this case.

Enter India.

The Modi-led government saw the opportunity in manufacturing and started offering incentives to firms that started manufacturing their products in India.

These days, several headlines discuss how Apple, Foxconn, Tesla, and many other global giants are setting up their manufacturing units in India.

With India’s manufacturing taking off, it does appear that the next two decades could be India's golden age.

The phenomenal performance of Indian markets has led many investors to ask whether the ideal investment strategy is to invest 100% into Indian benchmark indices.

In the last 10 years, the re-rating of multiple companies has led to a steep jump in valuations, which is backed by solid earnings growth.

The 5-year CAGR of the Sensex falls somewhere around 14-15%.

An interesting analysis also shows that in the past 2 decades, there have been 11 instances when the Sensex was trading at a PE ratio of 20x or lower at the beginning of the year. And in the following year, the benchmark went on to deliver a return of 29%.

Source: BSE, Ace Equity

This table is just to give a sense of how the Sensex has moved over the years and how its PE multiple matters a lot if you were to estimate the future growth for the next couple of years.

What the Next Decade Could Look Like…

It’s next to impossible to predict accurately what will happen next year, let alone a decade.

If we were to paint a picture of both sides of the story, the bull case includes a massive productivity boost due to the artificial intelligence (AI) boom that could possibly help corporate earnings grow much faster than anticipated.

On the other hand, rich valuation and a restrictive monetary policy can be significant headwinds for stocks.

In the past decade, widely popular initiatives like the Swachh Bharat Mission, Jan Dhan Yojana, and PM Awas Yojana, among others, have significantly improved the lives of the poor and raised their standard of living.

Though PM Modi's vision for Jan Dhan Yojana and demonetisation faced criticism, they led to millions of citizens opening bank accounts, greatly advancing financial inclusion for those previously excluded from the system.

Initiatives such as Make in India, Digital India, and Start-up India have been pivotal in shaping a New India, while GST is a landmark in economic reform.

The past few years have been challenging globally, with the COVID-19 pandemic and the Russia-Ukraine conflict testing leadership worldwide.

Despite this, India has emerged as a beacon of hope, shining brightly due to its strong leadership.

Even if you look at Indians' involvement in the capital markets, they are more optimistic than ever about their future, with many believing this is the best time to be in India.

Cities and towns are being transformed, and India is being modernised with new railways, gas pipelines, schools, and other infrastructure.

From auto to pharma to semiconductors and renewable energy, India is starting to take the lead globally.

Right now, the share of manufacturing in our GDP is very small, at around 17%. If we compare it with neighbouring nations like Bangladesh, Thailand, and Vietnam, it’s quite lower.

Now imagine how fast the Indian economy will grow once the manufacturing megatrend picks up pace in the developed world after 2024. We can see the good old days of 2008, before the global financial crisis, when India’s GDP grew by 8-9% annually.

For some people, this projected growth rate may be hard to believe. But it should come as no surprise to those who have been closely tracking the fundamental improvements in the Indian economy.

To conclude, we will closely track the 'New India' story. After all, if it were to happen, there would be an opportunity to make a fortune.

Stay tuned to this space for more.

Happy Learning!

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Sources and References:

1. ECONOMICTIMES
2. WIKIPEDIA

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

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