Our leading indicators for India continue to fly high, providing a useful lead for Indian equity performance so far this year. Following Modi’s convincing re-election we expect to see a continuation of structural reforms that enhance the productive capacity of India’s economy.

However, the main equity indices may not be the best implementation of this structural view noting the currently strong allocation to financials (SENSEX; 44%, MSCI India; 26%, Nifty; 41%). This EPS growth lag shown in the top-right chart seems to be unique to EMs, suggesting that economic growth doesn’t translate to profits for the largest listed companies in the same way as in DMs. Index representation of Indian equities is scarce relative to investment opportunities – India has the second-most listed companies in the world (after the US). While a significant proportion of these securities are practically uninvestable for institutional investors, there still remains high value-add for active management in India relative to other regions. Indeed we observe that active equity manager outperformance in India (net of fees) eclipses the significant underperformance in the aggregate EM and global equity space (bottom-left chart). We find that a simple equity screen on the Indian equity universe that focuses on high free-cash-flow generation while satisfying investable criteria mirrors active manager outperformance over the last 5 years. Please get in touch if you would like to see this screen.

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Source: Bloomberg, Macrobond, Variant Perception