Is India's Growth Reasonable Priced?

  • India’s expected EPS growth is high, 26.6%

  • India’s trailing P/E ratio is high, 23.9x

  • Foreign institutional investment in India surged in Q1 2019

  • 26.6% expected EPS growth at a price of 23.9x trailing EPS appears “reasonable”

 Growth:

India's expected long term EPS growth has increased from 15.5% in November 2017 to 26.6% in March 2019.  Simultaneously, the rest of the world (an average of 34 other countries) has seen expected EPS growth decrease from 13.6% to 10.7%.  See Chart Below:

India Chart 1.png

Source: MSCI and Accuvest

Value:

India is currently the most expensive country in our universe, trading at a "lofty" 23.9x price-to-trailing earnings ratio.  This valuation metric was 23.2x back in November 2017, and has averaged 22.9x over the 2 years ending March 31, 2019.  The rest of the world (average of 34 other countries) currently trades at a price to trailing earnings ratio of 15.6x, and has averaged 17.3x over the last 2 years.  See Chart Below:

India Chart 2.png

Source: MSCI and Accuvest

Is India’s Growth Reasonable Priced?

Balancing (dividing) India's expected earnings growth by its price-to-earnings multiple yields a growth-to-value ratio of 1.1x (6th out of 35 countries).  The rest of the world (average of other 34 countries) exhibits a growth-to-value ratio of only 0.69, and the United States trades a growth-to-value ratio of 0.70x.  See Chart Below: 

India Chart 3.png

Source: MSCI and Accuvest

Recent price momentum suggests India's expected growth is both realistic and attractive to global investors.  The MSCI India Index returned 9.2% in March, outperforming 45 other countries.  Over that same period, Indian equities saw Foreign Institutional Investor (FII) inflows of US$4.3bn, the largest monthly buying seen in the past two years. 

 Year-to-date through March 31st, Foreign Institutional Investors have net bought US$6.6bn in Indian equities, the largest among all of the EM Asian markets.  Foreign institutional ownership (as % total India market cap) has increased to 19.3% (0.5% higher than start of the year), but still remains below 2015 peak of about 21%.  The 2019 fund flows are being channeled into Banks, Energy and Utilities, while limiting Staples and Metals/Mining (Goldman Sachs Research).

 ETF Implementation

INDA, EPI, and INDY are the 3 most popular India ETFs (by AUM).  Relative to INDA (iShares MSCI India ETF), EPI offers higher allocations to Energy and Materials and lower allocations to Consumer Staples and Technology.  Meanwhile, INDY (relative to INDA) provides meaningfully higher exposure to Financials paired with less exposure to Technology, Healthcare and Energy.

 Conclusion:

Forecasted earnings growth can shift higher for a variety of reasons, but confidence around India’s growth appears to be building heading into April 11th general elections.  In fact, foreign fund flows into India have accelerated heading into and coming out of the last 4 general elections (Goldman Sachs Research).  Given a stable political environment, an accelerated pace of reforms, and a huge surge in working age population, India appears well positioned to deliver high economic and corporate profit growth.  Only the future can tell, but foreign investment and price momentum suggest that 23.9x earnings is a “reasonable” price for India’s 26.6% EPS growth.  This goes to show, when growth is in short supply (globally), growth at a reasonable price can be increasingly expensive. 

Sources: Accuvest, MSCI, and Goldman Sachs Research

 

 Disclosures

This article was written by James Calhoun, a Portfolio Manager at Accuvest Global Advisors. This article is strictly informational and should be used for research use only. It should not be construed as advertising material. The opinions expressed are not intended to provide investing or other advice or guidance with respect to the matters addressed in this brochure. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions to comply with matters addressed in this brochure. Charts and information are sourced from Accuvest, unless otherwise noted. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. You should seek advice from your financial adviser before making investment decisions. Investment risks are borne solely by the investor and not by AGA. AGA is an independent investment advisor registered with the SEC. All disclosures, marketing brochures, and supplemental firm sheets are available upon request.

Mexico Update: Equities, Peso & Politics - June 2018

In December I wrote an article entitled How Mexico Elections Could Affect Portfolios.  The general theme at that time was to maintain a very cautious approach to holding or buying Mexican assets due to the probability that a populist candidate with potentially unfriendly market policies would be elected president.  That July 1 election date is fast approaching and an update is warranted.

There are three main candidates in the race; Jose Antonio Meade (PRI), Ricardo Anaya (PAN), and Andres Manuel Lopez Obrador (MORENA).   Lopez Obrador, or AMLO as he is known, has narrowly lost the last two elections with cries of fraud causing violence and protest.  As polls show currently, he is a strong favorite with polling numbers in the high 40s and a 20 point lead on Anaya.  The most positive outcome, currently, is that somehow Meade or Anaya win.  However, with the lead so large and using history as a guide, even that scenario seems likely to end up with negative outcomes due to the serious protests and disruptions that are likely to ensue.

The more probable scenario is that AMLO wins and the markets have to deal with the fallout.  Of course, it is not known what that fallout would be precisely, but this candidate runs a highly populist campaign with a platform that could include renationalizing the energy sector, turning his back on NAFTA and other US-linked agreements, while pursuing fiscal and social policies that would definitely upset the business class and status quo.  His proponents are trying to paint him in a more friendly light, but there is considerable doubt that he will be anything other than hostile towards business and markets.  Where he fits relative to Chavez or the perception of Lula during his 2002 campaign is not yet known, but he is on the spectrum; so there is risk to financial markets. 

Someone on the Accuvest team is in Mexico several times a month consulting and advising on the financial markets.  Many of the political conversations we have include commentary that borders on hyperbolic.  Often times that kind of embellishment makes us think that the risk is fully priced in to the market.  However, there is still too much uncertainty about what kind of policy outcomes we might see.  Also, unfortunately, it is a little difficult to see much upside in any kind of scenario; expectations of a bounce or reversal seem unrewarding. 

The best long-term scenario is that someone other than AMLO wins the election.  Many of our conversations with political strategists focus on the undecided voters, which still represent a fairly large number, so perhaps a legitimate win for Anaya is still possible.  As we have heard many times, these voters and others who may have expressed an opinion in a poll, will all line up for whichever candidate is in 2nd place going into July 1; an ‘anyone buy AMLO’ voting bloc.  Simplistic math can support that thesis, but it would take everything falling into place.  And we are late in the campaign; debates have come and gone with no real changes in the polls.  Gaffes that may have doomed AMLO in previous elections do not seem likely at this point.  So, again, best case scenario – he somehow loses which would undoubtedly bring chaos.

Accuvest is in the portfolio management business, so having an implementable view on every market in the ACWI is required.  Our far-from-rosy outlook needs a bottom line recommendation for this article be meaningful.  As mentioned in December, we were not going to be long Mexican assets any time prior to the elections. 

Accuvest Country Rankings – June 2018

Rankings.JPG

Source: Accuvest Global Advisors

For a brief time the peso did strengthen to levels that seemed extreme and for certain portfolios we actually initiated a short position on the currency.  The weakening of the peso in the past month has been fairly dramatic in time and magnitude.  We are likely to cover half the position prior to the election as negative sentiment is certainly not a secret and is in the price that has rewarded us nicely.  A lot of the NAFTA rhetoric has also been negative and is baked in to the current price.

Mexican Peso (Price of 1USD in MXN)

Peso.JPG

Source: Bloomberg

Another point made in the December piece was that in the past Mexico has had fairly significant declines in asset values in times of crisis.  In all cases, those were buying opportunities.  Our attitude is to assume that such a crisis could unfold after the elections; hopefully not, and maybe it’s a low probability.  We will look to take advantage of this opportunity.  If nothing so severe comes to pass, the opportunity cost is low given Mexico’s small weight in the ACWI.   Accordingly, this is a time to be attentive and patient. 

Year-End Review: 3 Ways to Improve Client Interaction

Year-End Review: 3 Ways to Improve Client Interaction

Our travels often take us to Utah, the home of best-selling author, Steven Covey. As with much of America, his book changed the way many think and work. It is no surprise that the Wall Street Journal has called this book “the most influential business book of the century.” Despite being written many years ago, the principles and thoughts still remain insightful and thought-provoking.

How Mexican Politics & Upcoming Elections Could Affect Your Portfolio

How Mexican Politics & Upcoming Elections Could Affect Your Portfolio

It’s time: you need to tune your scanner for information coming out of Mexico. What has always smoldered has started to flame. Those flames could be a five-alarm fire in 2018. Hyperbole? Maybe, but in the course of over fifty visits to Mexico this year alone and 33 years in the country focused on the economic and financial environment in the country, it is clear to our firm that the country is at a critical juncture, and the presidential elections next year will be the determining factor of which way Mexico turns.