India poised to replace China as largest market in EM index: Morgan Stanley's Jonathan Garner

Within the next three years, India will surpass China as the largest market in the traditional Emerging Markets index, said Jonathan Garner

The Indian market is poised to outperform China for the fourth consecutive year, driven by strong domestic earnings, according to Jonathan Garner, Chief Asia and Emerging Markets Equity Strategist at Morgan Stanley, in an interview with Moneycontrol.

Garner attributes this outperformance to India's robust earnings growth environment, with at least 15 percent dollar earnings per share (EPS) growth, compared to China's stagnant EPS growth over the past decade.

Morgan Stanley remains bullish on global equities, particularly Japan and India, both of which have reached new highs this year. "India is our largest overweight in Emerging Markets," Garner stated.

Conversely, the brokerage is not optimistic about China, believing the market rally there has faded. Garner predicts that within the next three years, India will surpass China as the largest market in the traditional Emerging Markets index.

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"You can get these short covering low-quality bounces in a market that's becoming inherently more volatile i.e. the China market but the structural secural bullish market is right here in India" Garner told Moneycontrol.

India is on a growth trajectory, which is well-deserved given its earnings growth. Over the past three years, India's earnings growth has outpaced the overall emerging markets by 60 percentage points. The country is compounding earnings much faster than any other market, while China is not compounding earnings at all, he said.

China's valuations, essentially, represent a value trap. It is not advisable to buy equities simply based on a low one-year forward price-to-earnings (P/E) ratio or price-to-book ratio without considering the future earnings streams and return on equity (ROE) of the investment, added Garner.

In contrast, India's ROE is one of the highest in global markets. In fact, only the United States has a higher ROE than India, whereas China's ROE has approximately halved over the past decade, according to Jonathan Garner.

Speaking about the increasing attraction of foreign investors to India, Jonathan Garner noted a significant surge in the issuance of funds categorized as EMX China funds or Asia X China funds.

Garner emphasised that the next phase in India's market development involves truly global investors purchasing Indian assets for the first time.

The expert pointed out that India's presence in the All Country World Index (ACWI), the global equity superset worth around $50 trillion, has now grown to approximately 2 percent of that benchmark. This share has more than tripled in recent years.

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As a result, while it was previously within the tracking error to overlook India and other smaller markets, India's growth has now reached a point where global investors are compelled to start investing, Garner said.

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