Magic Markets Ep191: The India Opportunity

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The Finance Ghost: Welcome to episode 191 of Magic Markets. We’ve come off a few really, really cool shows. We’ve dealt with stuff like how to prepare for a crash, how to research stocks, how to build a portfolio – we had Craig from AnBro join us for that in episode 189. That was great. We covered quantum computing last week with Dimitri Zabelin, and that was also a great show. I highly recommend going back and listening to that great learning opportunity on stuff that you might not have had a helluva lot of exposure to with everyone talking about AI.

And today, Moe, we’re going to do something that we haven’t done before on Magic Markets at all. It’s got a nice macro flavour, so it wasn’t too hard to get you across the line with agreeing to do this. I suggested it because I’ve seen more and more South African corporates start to point to this as an area of growth, and I’m seeing more headlines around it as well. And that is the growth story of India, especially at a time where China seems to be losing some of its shine.

Obviously, the BRICS grouping is incredibly relevant to a South African audience because we are the S in BRICS. We’ll have to see where that acronym goes if all these countries keep joining us, as Turkey was the latest in the headlines.

Lots and lots to talk about today. And aside from welcoming you to the show that we do together every week and we really enjoy doing, I’ll let you dive straight in, maybe with a little bit around why India is relevant, why the BRICS are relevant, and what all of this really means for us.

 

Mohammed Nalla: India is just super topical. I was hosting a panel discussion here at CFA Toronto a little while ago, and this was one of the key focal points. You know, we had some speakers discussing China. We had some speakers discussing India. Lots of interest around India, certainly if you track the headlines and what companies are looking at.

And I guess this makes sense because if we look at the geopolitical backdrop, certainly in North America, it’s, you know, “big bad China” – lots of political tensions between China and the US filtering through to India’s benefit, because India is widely viewed as the largest democracy in the world, democracy resonating with a North American audience in stark contrast to the kind of control economy that you’re picking up in China. We’ll discuss some of the performance and so forth.

But let’s first jump into India specifically, because as you indicate, yes, it’s part of BRICS, something that quite topical a while ago. It comes and goes. Lots of emphasis in terms of new parties, new countries looking to get involved in BRICS. This, for me, is bigger than just BRICS. BRICS was the acronym, but it’s really a story of what I would categorize as the Global South, even though that might include economies in the northern hemisphere. The Global South, a group of economies looking to create some sort of cooperation amongst those economies; align their supply chains, align the investment narrative to try and build a counterbalance in what is increasingly becoming a multipolar world.

Now, looking at India specifically, this is a country that has between 1.2 to 1.4 billion people. It’s pretty much on par with where China is right now. But that number at the headline doesn’t quite tell the story. What does tell the story is if you have a look at the overall demographic dividend that’s coming through in India, the average population age in India is around 28, and that compares to China at 38. China’s now facing an aging problem that we saw come through very starkly in Japan. Remember, Japan a while ago was this economy that grew very, very quickly, rapidly grew to become the second largest economy in the world at one point in time. And then they hit that aging demographic, let’s call it hurdle, and the story started to unravel.

So, is China reaching that inflection point? A big question mark around that, but that is a positive point on the India story right now, is it’s a younger population. It’s also a population that speaks English. And this is very important because India was an early beneficiary of, for example, call centres. And again, it might irritate a lot of users. You know, you’re getting a phone call from a company, supposedly in South Africa, in my case, in Canada, but you’re actually speaking to someone all the way across the world in India. And that did cause some hiccups that led to very interesting developments. So, for example, there were elocution classes in India, helping Indians speak English with a North American accent. A sign of the times.

Now, if we look at other aspects, again, to India’s benefit, remember I indicated this is a democracy. It’s not a perfect democracy, but it is a democracy nonetheless. And that does give it a plus in terms of the balance sheet here. But bear in mind, it’s not a democracy that has been without its own challenges. There have been lots of headlines, certainly recently. If you go and follow Hindenburg research, they published a story, for example, of allegations of graft between one of India’s, let’s call it oligarchs as well as the government. Keep an eye on that. You can’t just say, hey, it’s democracy, you’re going to get good governance. As a rule, it does have its own challenges.

But alongside those challenges, India has been hard at work at implementing let’s call them market-friendly reforms. And this is again in contrast to China, where China has been implementing structural reforms orientated around fixing the social fabric, you know, focusing on education and a number of good things there, sure – but it hasn’t been really market-friendly. If we contrast that to India, a lot of the reforms have been around creating an easy process for foreign direct investment. And again, that’s what investors want to see.

Lastly, we’ve got to look at growth. And if you look at growth in India, that has come through strongly. Looking at GDP, the economy grew by 8.4% year on year in the last quarter and that’s been very, very strong. If we compare that to the Chinese growth story, Chinese growth has actually slowed down. It’s sub-5% here and contributing again to what has become a strong growth narrative around India.

It’s not a recent phenomenon. If you look at India’s growth over the last several years, it’s been above 6% and it’s expected to maintain that above-6% growth all the way out to 2026. So, a lot of compelling things coming through in India.

One last point, looking at the inflation story, because this talks to how China is running countercyclical to a lot of western economies. China’s actually had very low inflation. It moved into deflation a couple of quarters ago. And that’s in contrast to the rest of the world and western economies. Yes, inflation has been slowing but running above target. And then looking at India, inflation there, looking like emerging market inflation generally looks, so around 7% year-on-year. It did slow down from 7.5% back in July. But keep an eye out on that because inflation will erode some of the real returns that you are getting when you’re looking at those headline growth levels that we just spoke about.

Ghost, what I’m quite interested in, though, is if we can actually pivot from that into what you mentioned upfront. You said that there were a whole bunch of South African companies, for example, looking interested in India. Where has that come through? Has that actually held a bit of a sectoral tilt? Because I think that would be a nice way to kind of segue from this macro discussion into some of the underlying nuances.

 

The Finance Ghost: Yeah, it’s fascinating how certain regions just become flavour of the month, right? You spoke to inflation there, and if you look at the South African property funds, many of them went into Eastern Europe, which is obviously not India. But the reason they went there is because they looked at this and said, hey, this is a pretty good mix of a country we understand, a currency we like, and inflation, because South African investors actually need growth. They don’t really sit back and feel satisfied with something going up 1% or 2% a year, even in hard currency.

Historically, it just hasn’t really worked for a lot of the local property funds to run off into the UK, because that 1% or 2% a year growth – yes, if the rand really falls out of bed, it works quite well, but the rand is super, super volatile. The trajectory over time has been that it’s depreciated, and let’s see how that continues, or doesn’t, as the case may be, under a new government. But it just makes for very erratic total rand returns for investors.

So, companies tend to like these higher inflation regions because they actually deliver proper underlying growth in the currency in question. Now, unfortunately, a lot of South African corporates went and looked for that growth in Africa, where there are some very high inflation regions. The problem there is the currencies have also fallen out of bed, even relative to the rand, so that’s actually been a highly problematic region.

Australia, that’s another one that’s really hurt. A lot of South African corporates tried to grow in Australia. They made acquisitions and they got hurt, especially in retail.

South African corporates have had a very mixed bag in going overseas. And India has not historically been a super popular choice. You don’t see many companies there. It’s a bit like South America, which is odd, because you would think that emerging market management teams should actually be sticking to their knitting and buying in countries that they understand. It’s why I quite liked the Pepkor deal for Avenida over in Brazil, because, again, it’s an emerging market, it’s part of BRICS, it’s a country that I like to think that our local managers can understand, so why not India?

And we are seeing more and more of that now. Our commodity players are obviously exposed to India effectively as a customer rather than a place to invest because India is a large consumer of resources, much like other fast growing emerging markets. I think the one company on the JSE that has really stuck out as actually investing in India has been the broader Sanlam group. They’ve actually been there for a while. Their business there is called Shriram, and they have quite a complex structure there. They’re invested at different levels in it, in different underlying businesses.

The point is that, and you raised this topic earlier, or this concept, which I think is great, the demographic dividend. I think that’s a very, very nice way to put it because it talks to population growth, not just in terms of the number of people, but also how they are coming through the different income levels. And for a financial services group that is trying to sell things like insurance, that is extremely valuable. We’ve seen some of that story play out in South Africa, but India is just a much, much larger market. I mean, it’s a completely insanely-sized market, actually. So for a business like Sanlam, which has positioned itself as emerging market financial services, India is appealing.

And one wonders if we’ll see more activity in India over time, because for all the reasons I’ve raised there and all the reasons you raised upfront, it seems like a pretty decent choice for South African corporates to be looking at for international expansion – certainly better than some of the places like Australia, where our track record has been awful.

 

Mohammed Nalla: Looking at South African company exposure globally, I agree, the track record’s been very, very mixed. Talking about India and China specifically, the one success story for a long time was Naspers and their investment in Tencent in China. That was very early days. I’ll tell you why I asked that question, though. It’s very interesting, as Sanlam is a financial services company, if we look at the makeup of India’s economy, this is another macro point I really want to get into here, is that India is different to China. China was known as the factory of the world. If you look at India, I indicated upfront in terms of, for example, the services industry, the call centres, India also has a very strong IT sector. And so it makes sense for services businesses to actually look at a market like that.

I think it raises other interesting points, like how easy is it going to be for India to effectively replace China as the factory of the world? And I think it’s not easy at all. If you look at India, they’ve got massive infrastructural challenges, you know, similar to South Africa. You’ve got port restrictions, you’ve got massive hurdles with regards to the development of their railways. And if you compare that to China, you know, China has world class highways, they’ve got world class railways and ports and so forth. So to just think it’s a plug and play in that India is the new story, I think misses the point. I think India is a different story to China in that China was very much a manufacturing led growth story. India is still predominantly a services led growth story.

Keep that in the back of your mind. It’s very important because it does change how companies contextualise whether they can actually get some return or extract some growth out of that Indian market.

Another aspect to consider is just in general: political stability. Remember, India is a beneficiary of having political stability. Over the last several years, you know, Narendra Modi has been very firmly in power in India. Yes, it is a democracy. China’s got stability, but it’s not a democracy. And again, if you start getting question marks around that, look at the volatility we saw on Indian markets with just the simple fact that Modi did not win the size of majority that the market had expected. That came through with massive pressure on Indian stocks and then the market stabilized, realising, well, actually, yes, we can still expect continuity with regards to the political backdrop, but that’s the kind of risk that you could get coming out of India.

I want to segue from that into just a comparative between the performance of India versus China and here I’m going to look at the MSCI India index as well as the MSCI Emerging Markets index and then MSCI China.

And just having a look at that at a headline level, I mean, India’s actually shot the lights out. If you look at it over the course of the last year, looking at MSCI India, that’s up almost 30% compared to China being down around 9%. So that’s telling you that this narrative has actually been grounded in some of the performance more recently.

If we zoom out, though, and if you actually look at a five-year performance, it’s still pretty much the same story. China has really been sold off quite hard. And over the last five years, India up around 84% versus China down 30%. Now, it wasn’t always this way. If you go back to 2021, at that point in time, you actually had China up around 65% and India was trailing. It was trailing up around 30% there and thereabouts so you can actually see that switch in the narrative that has really been a product of where the world has gone. The escalating tensions between the US and China certainly weighing down on that. Also, looking at the Emerging Markets index as a whole, India’s weight has steadily increased. Given that performance has come through, it’s now over 20% and it’s narrowing the gap between them and China. China’s weight falling just below 24%. Keep an eye on that, because there’s a lot of passive investment happening. Whether you’re buying the MSCI Emerging Markets index, whether you’re buying either of these respective country’s indices, that also will skew some of the performance

 

The Finance Ghost: And of course, we can look past the macro view on the indices etc. and then look again at some of the single stocks you referenced: Naspers and Tencent. That is effectively what turned out to be the cornerstone investment in the broader Naspers group. It’s not to say that some companies haven’t tried to do the same in India. So, for example, Blue Label Telecoms for the longest time had an investment in a business called Oxigen in India. And they also played around a little bit in Mexico as well.

It’s not that South Africans haven’t dabbled in this stuff. I think Tencent is a particularly outsized example of when something can really go right and it talks to how venture capital actually works as an industry. You go and you buy a whole basket of things and you hope that one is going to absolutely fly. Now, Naspers-Prosus is basically a VC at scale. That’s effectively how they think, a little bit less so under new management though. They are starting to mature a bit as a business and they’re looking for businesses that are cash flow positive, which of course is the exact opposite of what VCs are typically looking at. But perhaps somewhere inside India, there will be another Tencent that will emerge. And maybe if we’re really lucky, a South African business will get a handle on it early on. That beautiful example of Naspers – Tencent, I think is just such a rarity. It’s incredible. Many people talk about how this Chinese app basically created vast wealth for so many South African investors. It’s a great story.

 

Mohammed Nalla: Indeed it is. And again, you know, it’s about getting in at the right time, getting in early. And the question mark for me is, is this the right time? Just comparing the MSCI India versus MSCI China indices, let’s touch on some of those valuation metrics.

If you look at a P/E ratio, India trading at around 24.5x. I don’t think we’re getting in early right now. I think the market’s priced in a lot of good news. Let’s compare that to China at around 10.8x. For me, just on a P/E basis, highlighting how India has actually been the growth story and China’s ironically flipped around from being the growth story into being arguably the value story. A big question mark around that, but let’s look at other metrics. If you look at price/sales at an aggregate level, MSCI India 3.2x versus China at 1.2x. Now these are simplifications, but again, we’ve got to start there and then maybe move down into a company level.

Lastly, price- to-book, if you look at India 4x and looking at China 1.5x. So this, I think, showing you a very stark contrast between those two.

And the question is: is it maybe too late to get into India unless you’re going to go and do a lot of deep dive research, find specific companies there that are maybe not trading at these elevated valuations or potentially where those valuations are justified? Looking at some of the largest companies in India, I mean, great stories there. You’ve got Reliance Industries, that’s the business owned by Mukesh Ambani, one of the Indian oligarchs, if you want to call it that. And they’re involved in everything from oil and gas. They’ve got telecoms, they’ve got retail in there. They’ve recently announced, I think we may have mentioned this recently on Magic Markets, perhaps in the premium show, a deal with Disney. They had a partnership with Disney. They’re now rolling that up into a separate company where Reliance is going to have a majority stake and Disney is the junior partner in that. That’s really showing you a change in some of the power dynamics coming out of India.

You’ve also got other large companies there, like Infosys Limited, an IT company. It’s got a market cap of over $95 billion and is one of the largest IT services companies globally. The point I want to land on here, Ghost, is again going back down to a sector level – India is predominantly dominated by financial services. They are not known as being a manufacturing hub. And again, maybe that’s the opportunity for South African firms, because South Africa’s got this dichotomy. We’ve got large primary industries, like miners. We don’t have many large manufacturing concerns. We’re not known as a manufacturing emerging market economy. And then we’ve got a massive outsized and very competent services sector coming through, not just in real estate, but you’ve got finance and insurance as well. So perhaps that’s the narrative or the linkage between South Africa and India and why some tie-ups or at least strategic investments from South African powerhouses into that market might make sense.

But again, be very sensitive, look at those announcements and see where they’re getting involved. Are they actually overpaying for growth? Because that is the risk when India seems to be priced quite heavily for that growth story.

I think that’s where we got to land it though. Ghost, we’ve got to wrap it up. This is a big discussion. It’s probably the first of many discussions we’re going to have on emerging markets. We have brought on other experts. So perhaps we bring on a guest in future who can unpack this for us in detail. We are looking at potentially bringing on some international guests that can help us unpack this emerging market story. Maybe India, maybe LATAM. We’ve discussed LATAM – it’s like the forgotten stepchild. I think there are lots of opportunities there. We’ve covered a stock like MercadoLibre in Magic Markets Premium. So again, maybe just some thought starters for some future shows.

 

The Finance Ghost: Yeah, absolutely. And I’ll make one final comment on India. And it’s something you see on Twitter all the time or X – that is just the sheer number of CEOs of American tech companies that are from India. It’s actually quite remarkable and it speaks to the depth of talent in the country. India is a really interesting investment destination with lots of potential, huge talent and ability there. And an interesting story to track and especially for Sanlam shareholders, but also other South African corporates who might be looking at it.

Moe, I think we will leave it there. Thank you to our listeners for joining us. We hope you’ve enjoyed our recent slate of shows. Let us know either way, we always welcome your feedback. Obviously, reach out to us on the socials and as always, we will see you again next week. Ciao.

 

Mohammed Nalla: Cheers.

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