India : Once In A Lifetime Opportunity

As part of our on-going webinar series “Crystal Gazing Next Decade of Wealth Creation for Investors (Year 2020 – 2030)”, we’ve done many discerning dialogues with money managers. Here we present an interesting episode with the New CEO at Motilal Oswal Asset Management Company (MOAMC), Mr. Navin Agarwal.

This is a very important article for investors who wish to create wealth in long term, especially today when most are getting gung-ho about global investing owing to the recency bias of the past performance, forgetting that even regulatory disclaimers warn against following recent trends of the past performance. Let’s begin.

As per Dec 2019 World Bank’s official data, India is worth USD 2.8 Tn economy in terms of GDP and we represent 2.4% of the world economy. Going by history, it has taken us, a long period of 58 years since independence to achieve the USD 1 Tn GDP mark, in 2007. However, the next 1 USD Tn happened fairly quickly in 7 years, by 2014. As we write this piece of article on INDIA, let us tell you that, despite COVID, & 23.9% fall in Q1 – FY 20-21, India’s GDP stands at USD 2.6 to 2.7 Tn. Let’s understand what this means on where we stand globally, and from what lies ahead.

• There are only 8 countries in the World in USD 2 Tn club – US, China, Japan, Germany, India, UK, France, Italy.
• Only 4 in the elite USD 3 Tn GDP club – USA, China, Japan, Germany,
• Just 3 in the elite of the elite USD 5 Tn club – USA, China, Japan.

As presented by Mr. Navin Agarwal, – “ India is slated to enter this elite of the elite USD 5 Tn club over the next decade. So for investors, it’s imperative to look at this big picture and to draw parallels for equity markets, take guidance from the trajectories of the US, China, and Japan which have seen the transition from $ 2.5 Tn to $ 5 Tn GDP. The US traversed this journey in 10 Years, Japan in 8 years, and China in 5 Years. What happened to the stock markets of these economies during this period:

• US: S&P 500 delivered a CAGR ( in USD ) of 17% during this period.
• China: Shanghai CE delivered a CAGR ( in USD ) of 28% during this period
• Japan: Nikkei delivered a CAGR ( in USD ) of 7% during this period

Highlight 1: Economic History of US, China, and Japan conveys that the strongest growth in equities comes when the GDP of these economies traversed from UD 2.5 Tn to 5 Tn, and despite shocks that may keep coming intermittently Indian equities will still create a lot of wealth at the back of GDP growth.

INDIA might not grow as high as China, as China had multiple engines, & it blossomed in the era of ultra-high growth. India is unlikely to compound at Japan’s rate given our attractive demographics, large population, stable govt, lots of reforms executed over the last decade. India is more closely comparable to the US in terms of the democratic economic system and composition businesses & sectors.

As the Indian market will add the next trillion to its GDP, there will be many non – linear growth opportunities for equity investors to create wealth and over the next decade as India would witness a doubling of GDP to USD 5 Tn, stock markets could compound at somewhere around 15% to 17% in INR term.

 Stocks Prices are slaves of Earnings

Indian corporate earnings and Stock market returns go hand in hand. Index earnings and index prices are two sides of the same coin. In the first decade, 2000-2010, Nifty EPS was at 13% and so was Nifty CAGR. In the subsequent decade, 2010-2020, Nifty EPS was at 7% and so was Nifty CAGR. Earnings have been falling over the last decade and probably at the lowest level as of now. This is because corporate profitability which once was almost 8% of the GDP has come down to the lowest ever number for to 3.5% as of now.

History of mean revision conveys, that from lowest corporate profitability, even if corporate profitability sees a revision to the mean of 5%, this implies, 66% rise in earnings leading fall of similar magnitude in price to earnings, and thereby creating the path for many years of double-digit Nifty returns as stock prices are slaves to earnings.

Winners of one decade become the losers of the next decade and vice a versa

Between the Year 2000 to 2010, Indian equities were up 5 times while the US delivered CAGR of 7%, and then the next decade opposite happened, whereby US equities delivered 2.4 times while Indian equities have lost 33% in USD terms. Since 2008, In dollar terms, S&P 500 has given 6.2% CAGR while MSCI India Index has given -2.7%. This has led to huge valuations GAP. Today, there is a huge divergence in the performances of equities in India Vs US. Divergence exists not just at the front end but, across the market cap categories within listed stocks in India, compared to global peers.

Highlight 2: Winners of one decade become the losers of the next decade and vice versa, so in all likelihood, the next decade is a decade of INDIA and to bridges the gap created by divergences, Indian equities need to rise in double digits over the next decade. The famous quote from the subject of History which is apt in the context of this article is that. “The greatest glory in living lies not in never falling, but in rising every time we fall. – Nelson Mandela”

Equities Vs Gold & Fixed Income

There is a lot of debate these days around how gold has done better than equities, how fixed Income at times does better than equities. All that is true.

However, long term wealth is created by equities. Going by the 77 Years data of US equities vs other asset classes from 1942 to 2019, equities (S&P 500 delivered 144 times more returns than gold, 60 times fixed income. In absolute terms, equities multiplied wealth by 5000 times gold by 37 times, fixed income 89 times. All this is simply because of the power of compounding which is not taught even is Harvard and Stanford universities, but is the 8^th wonder. Money compounding at 15% pa becomes 4 times in 10 years, and 16 times in 20 years, 66 times in 30 years.

Comparing Equity to Fixed income, Navin shared interesting lines by Nick Murray from the book “Simple Wealth Inevitable Wealth” i.e. “All our common sense and all our life experience tells us that the owners of good businesses make more money than the loaners to the big businesses.” 

We at AdviceSense Wealth Management work with investors not just to make them invest, but associate to make informed investment decisions towards long term wealth creation and prosperity of our clients.