• Daniel Lee

Considering Indian equities? Here's what you need to know about the MSCI India index

Too Long Didn’t Read

Indian equity as a long-term instrument:

  • Good long-term growth prospect [Swot analysis]

  • Earning looks good – consistency in margins and return on investments

  • Weak balance sheet may be a problem – vulnerable to periods with low credit supply

  • Exposure to foreign exchange risk is high and unattractive


But the question of whether India equities is a good investment today would depend on the valuation that will be covered in another article.


In the last article, we explored the plus and minus points of Indian economy, today we will examine the investment prospects of India through the lens of the MSCI India Index.


Figures from MSCI Asia ex-Japan [AEJ] index will be used as a benchmark in our analysis.

We will be focusing on two things while we perform the analysis:

  1. Historical Income statement and Balance sheet of the index

  2. How Indian equities may perform given future economic developments


Let’s dive right into it.

Earnings and Profitability

On historical earnings:

  • Superior earning performance and growth in India as compared to AEJ

  • Slowing of earnings to be experienced by both India and AEJ


Caution on India’s earning’s recovery over the past decade

  • Growth is supported by unsustainable expansionary policies

  • The growth comes at the cost of India’s fiscal deficit, inflation and banking system health – Twin deficit


How will India perform amidst global economic slowdown?

  • Increased dependency and sensitivity to the global economy

  • A slowdown in global business activity may lead to increased local job losses

  • Consumption may deteriorate as a result of an increase in unemployment

  • Lower consumption will result in lower earnings thereby driving increase job losses

Interestingly, Indian equities have displayed consistency in its ability to deliver double-digit profitability margins and return on equity. The same phenomenon can also be seen in MSCI Asia Ex Jap.


Liquidity and Debt

Overall comments:

  • A weakening of liquidity may pose danger during a period with poor credit supply

  • Corporations in India have been bearing on higher levels of debt over the past decade

  • Slight improvement in balance sheet health over the past 2-3 years


Caution on India economy’s poor quality of balance sheet - Non-Performing Assets [NPA].

  • Banks have lent unwisely resulting in high levels of gross NPA (9.1% vs D.M <2%)

  • The weakening banking sector has led to poor credit supply

  • It affects the business ability to finance their operations or expansions.

  • Failure of banks – if large enough – may result in meltdown of India’s financial system

India's balance of trade and effects on Indian Rupee

Given India’s persistent balance of payment deficit, the rupee has experienced persistent supply surplus which has led to the depreciation of Indian Rupee over the years.


Such a phenomenon is not desirable as it exposes investors to a high level of currency risks that may easily wipe out any capital or dividend returns.


To find out more about India’s current account deficit, balance of payment and economic strength, you can refer to the article here.


Too Long Didn’t Read

In the long run, there is no doubt that India equities will benefit greatly as the country progresses both economically and socially.


The long-term structural trends will provide ample opportunities for companies to grow and prosper thereby driving up the prices for Indian equities.


However, in the short run, Indian equities are exposed to external risks such as global slow down or local credit crunch might cripple the operations of Indian companies.


That being said, whether Indian equities is the right instrument for your investment portfolio will depend largely on your

  • Investment goals

  • Financial plans - both short and long term

  • Cash flow situation


Are you able to commit to the long-term investment horizon without disrupting your short-term plans? Do you need to bear such a risk in investing in India for your financial plans or are you better of with other investment instruments?


Should you need someone to talk to pertaining to your retirement and investment plans, you can get in touch with me here.


In the next article, we will look at the valuation of Indian equities and whether or not it is a good time to invest.


Do remember to subscribe or join my telegram channel: https://t.me/joinchat/AAAAAFVEzUiPA4IgQEm4vAto keep yourself updated!

Daniel is a Licensed Financial Consultant with MAS, who specializes in retirement and investments planning. Find out more here.


Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore

The information pertaining to indexes are extracted directly from bloomberg terminal

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