India Now the Envy of Emerging Markets

China is the largest of the developing economies, but that heft hasn’t meant much regarding equity market upside. In fact, Chinese stocks have been downright disappointing over the past several years as highlighted by a decline of 48.8% for the MSCI China Index for the three years ending April 19.

That’s more than twice as bad as the performance notched by the MSCI Emerging Markets Index over the same period. The struggles of those two benchmarks imply emerging markets equities have been a lost cause and that’s true of many broad-based strategies. However, India has been a beacon of strength in an otherwise downtrodden asset class.

Over the past three years, the MSCI India Index surged 36.5%, not only trouncing the MSCI China Index and the emerging markets benchmark, but proving less volatile than those gauges, too. For the six years ending 2023, Indian stocks beat both Chinese rivals and the broader emerging markets complex in four of those years.

Those gains have been supported by remarkable economic growth, more of which is in store. About a year ago, India’s GDP stood at $3.7 trillion, but that figure could swell to $7 trillion by 2030, buoyed by favorable demographics, an expanding middle class, increased liberalization of its financial markets and government infrastructure spending.

More Fantastic Fundamentals for India

As China proves, a large population isn’t a guarantee of equity market upside, but there were times when Chinese stocks performed well that the country’s population was viewed as a catalyst. Well, India is now the largest country in the world by population.

“However, a key advantage for India lies in the high proportion of youth in its population as compared to China. As of 2021, India had almost 227 million more people under the age of 40 as compared to China. The United Nations estimates that India’s population will peak at 1.7 billion people in 2063, suggesting the demographic advantage will likely remain in place for another 40 years,” according to State Street Global Advisors (SSGA).

That’s encouraging, but there’s still work to be done. For example, productivity among Indian workers, as measured in dollar terms, is significantly lower than in the U.S. and China. The country also needs to do more to increase research and development and encourage more labor market participation among women. Should those objectives be accomplished, India’s total factor productivity (TFP) would likely rise, potentially stoking more foreign investment and more upside for the nation’s financial markets. In TFP terms, things are heading in the right direction in India.

“TFP growth contributes significantly to the upward transition of an economy to higher income levels. Interestingly, India’s TFP has improved markedly since 2000, and by a faster clip than that of major economies,” adds SSGA.

Other Reasons India Could Be Long-Term Winner

Another reason India can remain the star of large emerging markets for some time is the point that its economy isn’t export dependent as those of China or Brazil. In fact, domestic consumption accounts for 60% of Indian GDP – a percentage that’s close to those found in some large industrialized economies.

Then there’s government spending. While that’s a controversial issue in the U.S., India isn’t nearly the big spender that China and the U.S. are. Moreover, India has the opportunity to leverage government expenditures as a driver of GDP growth while keeping fiscal deficits in check.

“At the macroeconomic level, capital spending’s share of total expenditure has more than doubled in three years. Still, this is not in overdrive as the share of capital formation in real GDP is 35%, 10 percentage points (PP) below that of China’s in 2022,” concludes SSGA.

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