New India: Why this asset class demands a premium multiple?

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It seems the prophecy of the late Charlie Munger, billionaire, ace investor and vice-chairman of Berkshire Hathway, on the India story is going to be rendered untrue, primarily on account of the resilience of the Indian economy in the past few years, even as economic headwinds have unfolded many challenges.

In 2017, the billionaire talked down India as an investment destination four years after liquidating his India portfolio. Munger said India was a country where people were burdened by a system that thwarts progress and faces multiple issues, such as an overbearing caste system, overpopulation, and endemic corruption, essentially making rapid economic transformation a tall ask.

Six years later, some of the world's largest asset managers continue to see India as an accidental asset allocation item and not a special asset class. This belief is changing rapidly, though.

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A critical factor in this shift is political stability. The government does not hamper growth in India but works with the industry to drive the India story.

A decade ago, most state and central governments were not conducive to establishing and promoting new businesses and industries outside the occasional lip service. On the ground, it meant production facilities and factories were in a bureaucratic flux. That is changing now, and the bureaucratic red tape is falling apart.

At this juncture, the state and the Union governments are emerging as facilitators of good business and ensuring potential sectors or companies that can help the economy are given incentives for better manufacturing and production facilities to help drive economic growth and progress.

In essence, this transformation is sowing the seeds for India to emerge as part of the core asset allocation of global investors. Developed markets and US equities form the most significant portion of endowment and pension funds, allotting a portion of their money to emerging markets, of which a portion reaches India.

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India's exposure in the global asset allocation market is accidental as it stays in the emerging markets bucket. As the economy edges near the $4-trillion threshold, a change in perception can help India catapult as a separate asset allocation item, commanding a significant 3-5 percent allocation in the broader global portfolio. It would be great news and change the India story significantly. The premium attached to the Indian market within the emerging market basket will likely be sustained.

First, as mentioned earlier, political stability has been a great news in aiding economic growth. The continuity and the citizen-focused governance structure followed by the present dispensation is rare and will help India command a premium rating.

Second, despite global economic headwinds, India continues to be the fastest-growing large economy, aided by structural drivers in place. This growth will help sustain the premium rating.

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Finally, I believe in the India story for its consistency. An unwritten rule in the stock market states that consistent growth and quality of earnings demand a higher valuation and a higher premium than cyclical earnings or hyper-cyclical growth.

India ticks these boxes and has delivered consistent secular earnings, also visible in the GST collection data, which shows a steady uptick, proving that the the growth story is broad-based, uniform and more resilient to exogenous shocks.

It takes us to an old Indian adage that says, we (read the Indian market) boast of high quality, which demands a premium. It's crucial to avoid comparing our current valuation with historical figures. India's PE multiple was around 17-18, a decade ago. It has now risen to 21-22 and gone beyond. To understand the shift, we must recognise that today's India differs fundamentally from one with fractured mandates, coalition governments, and no structural levers.

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Today's India, often called 'New India', demands a higher valuation multiple and a premium. The landscape has evolved, and structural changes are in place. Global investors may have overlooked this transformation and the opportunities it presents, though it is bound to change soon. Foreign Portfolio Investors (FPIs) appear to have missed the initial phase of the recent market rally in India over the last couple of years. FPI holdings in the Indian market are at a multi-year low, below 9 percent, compared to the peak of over 20 percent in the past. It indicates that global investors may have overlooked the potential of the Indian market.

With India becoming an asset class and India's governance premium sustaining, I am confident the 2030s will be our decade and of the stock called India.

The author is the founder and CEO of SAMCO Securities