Indian markets have a very high expected earnings growth in next 12 months and it is expected to better than other markets according to consensus earnings estimates in Bloomberg, the three-year estimates are lowest with a dip in earnings in the 2nd year.
By Shantanu Awasthi
India, India, India....that is most of Resident Indians think of while looking at investments. No doubt there is a good momentum and the Indian markets have performed well in recent past and we have demographic advantages which will fuel domestic consumption theme.
India stands out as one of the fastest growing economies in the world with a potential to surpass leading world economies in size in the long run.
However, there are a few data points to set the perspective right. Indian equity markets are the eighth largest by market capitalization. The market capitalization of top 4 listed companies in the world is more than the market capitalization of Indian equity markets.
India is not the top performing market for 1 year, 3 years and 5-year return perspective. The dollar has been appreciating against the Rupee at a rate of 4 percent p.a. on a long-term average.
As far as global investors are concerned, Indian markets are like a midcap and should carry a country risk premium. While a lot of companies across industries and sectors are listed on Indian bourses and are dominant players in their respective domains in domestic market but there are very few companies which are global leaders.
There have been two major problems namely, not having large economic scale to cater to global markets and lack of research & development initiatives by Indian corporate.
Meanwhile, China has been able to make headways in attaining economic scales to cater to global demand, and both Europe & US have taken the lead in innovative products through R&D initiatives. Also, Indian markets have not delivered the highest returns as shown in the table below.
For the period of 2012 – 2017, Bloomberg depicts that India was a 19th ranked market in terms of returns as depicted in data below. Refer to the table below.
The expected growth of future earnings for the top few indices of the world depicts a better picture for the markets.
While the Indian markets have a very high expected earnings growth in next 12 months and it is expected to better than other markets according to consensus earnings estimates in Bloomberg, the three-year estimates are lowest with a dip in earnings in the 2nd year.
While one may have a different opinion but both past data and future prospects depict that there is clearly an opportunity in International markets also with seemingly good growth prospects in a couple of markets namely S&P 500 and Hang Seng.
The table below depicts the consensus earnings growth estimates for a few top indices.
Further, in order to look into the valuation, I would like to refer to the most basic parameters Price to Earnings and Price to book and for both these parameters, there are clearly other markets which could do better than Indian markets. Below is a snapshot of the comparison.
Resident Indians have a tendency to ignore other markets since we never had access to the International markets for most of the 20th century till the Liberalised Remittance Scheme came into existence in 2004.
Further, the LRS witnessed very less traction and that too was limited to buying a property, child education or for immigration, etc.
This could have been because of lack of awareness and avenues. If someone has knowingly ignored International markets that might not be the most prudent of the decisions we make as we might be missing an opportunity to diversify and earn more.
There are three ways to get exposure to international markets:
Firstly, there are more 45 mutual fund schemes which work as feeder funds, direct funds or ETF which invest in foreign equity, Region or country, themes, commodities and real estate. It is important to look into the fee structure, nomenclature of these funds and the exposure.
There are also the host of investment options available through the LRS route. These could be international mutual funds, Fund of funds under insurance wrapper with both regular savings and lump sum options.
These funds usually give exposure to more than 200 schemes of mutual funds, hedge funds, REIT and international property, etc.
While the objectives of investment might differ from simple investments to child education or owning a property abroad, it is important to diversify and take exposure into opportunities abroad which also have potential to generate superior returns with reasonable valuations.Disclaimer: The author is Head – Family Office, Products and International Business, Karvy Private Wealth. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.