Investing in India
India's growth is real and largely priced in. What you are buying is the gap between the growth and the multiple.
Separate the country's prospects from the shares' prospects, which are not the same thing.
How Investing in India works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The order matters more than the maths
Cheapness is the last question. Ask it first and you produce a list of companies the market has given up on, and it is usually right.
- 1
Everyone knows the story
Young population, rising incomes, deepening capital markets. All true, all consensus, and therefore all in the price. A country growing at 7% does not automatically produce good equity returns; it produces expensive equities.
The historical relationship between a country's GDP growth and its stock market returns is famously weak, and sometimes negative.
- 2
Domestic flows now set the price
A structural shift of Indian household savings into equities via monthly systematic plans provides a persistent, price-insensitive bid. That supports valuations, and it means the market can stay expensive far longer than a foreign investor expects.
- 3
Promoter holdings matter
Many Indian companies are controlled by a founding family, the promoter. Read the related-party transactions and the pledged-share disclosures. Minority shareholders can be an afterthought, and the accounts will tell you if they are.
- 4
Check the multiple before the narrative
Use a PEG rather than a raw P/E, and be honest about whether the growth rate you are assuming can persist. High growth mean-reverts, and India is not exempt from arithmetic.
Ordinary. The market expects steady, unremarkable growth.
You can explain why fast national growth does not guarantee good stock returns.
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India's growth is real and largely priced in. What you are buying is the gap between the growth and the multiple.
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