India: A good macro story but fully priced

Brigette Leckie

Koda Capital

Recent on-the-ground research in India overwhelmingly highlighted strong support for Modi and the belief that he is the right Prime Minister to take India to the next stage in its economic development. Few would dispute the positives underpinning India, specifically: i) its demographics, ii) expertise in technology and electronics assisted by English language skills, iii) robust judicial process, iv) legal reasoning and v) the government’s focus on lifting the bottom 25% of income earners to a higher level. 

The latest economic data on India has been slightly firmer as shown by the following industrial production chart. There has been a modest rebound post the soft spot heading into the general Indian elections in May. Obviously, there are questions surrounding the forthcoming monsoon season and whether it will deliver sufficient rain or not, with warnings already in place on Chennai water shortages. In addition to this, there are the long-term systemic problems of pollution, soil erosion, overpopulation and communicable diseases. The key is to ascertain the cyclical growth dynamics versus the long-term ones. Short-term cyclical drivers are suggesting growth is improving and will lift further barring a poor monsoon season with little rain. The medium- and long-term outlook for India is a mix of the positives as mentioned above and the Government’s management of the negatives, also listed above. Prime Minister Modi does seem to have the country’s best interests at heart and this was heard firsthand in meetings with different groups of locals. 


Technology-wise, India has embraced device diffusion with an extensive uptake of many forms of mobile devices across the population. This has spawned the growth of new industries such as micro finance, advanced notice of agricultural prices with better supply-demand dynamics, and also improvements in population health, such as removal of cataracts, and treatment of parasites. All in all, these developments assisted by technology are creating a good long-term investment story that requires monitoring.

India has a solid investment thesis, but this value is more than reflected in the current price and actually has been the case for a prolonged period. As the chart shows, India is far more expensive than emerging markets and this is also the case when compared to developed markets. 

Applying counterfactual reasoning into portfolio optimizing indicates that India is expensive and the best opportunities in emerging markets lie in China and Russia where we are currently positioning. Emerging markets are also cheap and attractive versus developed markets, which further enhances our China and Russia asset allocation. This counterfactual argument provides additional confidence that the portfolio allocations are correctly fine-tuned for the current global macro environment (both growth and political), plus critically for value of money.

India is a riveting potential investment case but currently expensive and hence our decision is to avoid for now. It is, though, important to put its current valuation into context with the propensity for its above-expected market returns performance. Emerging markets are well known for the booms and busts. India, by contrast, is fully priced and expensive at present but definitely not a bubble, based on its underlying positive fundamentals.

Looking at India from another analysis technique, the data indicates that the arbitrage opportunities for India are significantly less than China. Simply put, the return relativity of the top-quartile stocks for China surpasses India on a consistent basis. The alpha opportunity is significantly greater in China due to the market depth and inefficiency. 

In summary, emerging markets are undervalued and inexpensive. Our evidence-based portfolios (both on the ground and via global data sets) are positioned to capitalize on this market distortion. In doing so, we have invested in China, Russia and other niche markets in this specialised investment category. For now, India is too expensive for our portfolios. We will continue monitoring it and should key metrics become more attractive we would look to tactically build exposure.

Author's note: Koda's Head of Managed Funds Research and I have recently returned to Australia from an exhaustive research trip to Asia, Eastern & Western Europe, the UK and India. Over the three week trip we met with a number of fund managers, industry and policy experts, as well as economists to form our macro view and to be able to best position client portfolios. 


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This research note has been prepared without consideration of any client's investment objectives, financial situation or needs. Before acting on any advice in this document, Koda Capital Pty Ltd recommends that you consider whether this is appropriate for your circumstances. While this document is based on the information from sources which are considered reliable, Koda Capital Pty Ltd, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Koda does not accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. © Copyright Koda Capital 2019 | AFSL: 452 581 | ABN: 65 166 491 961 |

Brigette Leckie
Chief Investment Officer & Partner
Koda Capital

Brigette Leckie has worked in financial markets since the early 1990s and has been Chief Investment Officer & Partner at Koda Capital since 2014.

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