Trade Idea - ETF MSCI India

Investment Thesis

India could be an excellent diversification and end up being among the best performing stock markets in 2025.

Strategists expect the domestic demand trend to be key for India in 2025 with an expected 6.5% GDP growth in 2025, trumping weak external demand conditions.

Strong balance sheets of corporates and the financial sector coupled with policy space keeps them optimistic on the domestic demand trend. They expect consumption demand to remain strong, supported by a recovery in rural demand, while on the investment side, public and household capex are expected to provide support.

Since December, India is showing a cyclical recovery and stronger fiscal spending with lower rates should help drive an earnings reacceleration.

Analysts forecast earnings growth of about 18-20% annually over the next 4 to 5 years.

Catalysts

a) The next leg of reforms: The Maharashtra elections have put to rest concerns market participants may have had about the Central government's ability to undertake reforms. Of the policy priorities, getting the primary deficit to zero seems to be at the top. Infrastructure spending, restructuring of GST rates, direct tax reforms, more free trade agreements and focus on energy transition are other areas.

b) Earnings: Consensus estimates of earnings growth between 15 and 20% annually for the next 3-5 years.

c) Global markets: India's correlation of returns with global equities continues to decline and is lower than history but absolute returns are still hinged to the world. Policy action in China, the US and the outcome of the ongoing conflicts in the world among other things could have an impact on how Indian earnings and stocks behave.

d) Short rates should go down by 50bps, with two consecutive rate cuts of 25bps each, commencing in Feb-25.

Fundamental Analysis & Valuation

With a forecasted earnings growth of 20% and a forward P/E of 20, the PEG ratio is 1, which is seriously cheap.

Technical Analysis/Timing

The risk/reward profile looks appealing after the recent correction.

Scenario Analysis

Base case (50% probability) – BSE Sensex: 93,000: This level assumes continuation in India's gains in macro stability via fiscal consolidation, increased private investment and a positive gap between real growth and real rates. Robust domestic growth, no recession in the US and benign oil prices are also part of our assumptions. We use a modest reduction in interest rates and a positive liquidity environment as the base case for monetary policy. We do not anticipate a bunching up of issuances and the retail bid keeps its nose ahead of the supply. Sensex earnings compound at 17% annually through F2027.

Bull case (30% probability) – BSE Sensex: 105,000: In addition to the above, oil prices are persistently below US$70s, resulting in lower domestic inflation and prompting more rate cuts from the RBI. An improved energy balance and successful intervention in vegetable markets to subdue volatility in prices help improve India's growth outlook. The US growth cycle continues, with global share prices responding positively and foreign flows into India surprising to the upside. An end to the Ukraine-Russia conflict could bring INR balances in Russia back to India. Government reforms surprise to the upside with a slew of GST rate cuts and some progress on farm laws. Earnings growth compounds at 20% annually over F2024-27.

Bear case (20% probability) – BSE Sensex: 70,000: Oil prices surge past US$110/barrel and the RBI ends up tightening to protect macro stability and global growth slows meaningfully and notably the US slips into recession. Sensex earnings compound at 15% annually over F2024-26 with perceptibly lower growth in F2026 and equity multiples de-rate to reflect poor macro conditions.

Conclusion

India is forecasted to lead growth among all countries analyzed in a study by Ray Dalio.

A diversified investment strategy should therefore include a position in the Indian stock market, either via an actively managed fund or via an ETF MSCI India.

This graphic shows projected real GDP growth over the next decade, based on Ray Dalio's Great Powers Index 2024 report.