By JAMES SPENCE
The Indian equity market has been outperforming non-US stock markets for 10 years, as can be seen from the below chart.
In the past 5 years, it has also outperformed the US.
Even after India’s recent market correction, the level of outperformance, in USD, has been 3% per annum in the past five years.
By virtue of various orientations in the world – Trump policy being just one of these – India finds itself well placed in the shakedown of geopolitics. Before we consider these possibilities, it is worth spending some time understanding the period of liberalisation that has taken place since the writer’s first trip to India in 1990.
Back then, culturally India was still very much in the thrall of policies that were gestated in the post-independence period of Mahatma Gandhi and India’s first prime minister Jawaharlal Nehru. These were a mix of excessive permitting and bureaucracy (no prizes for guessing from whom these were learnt from), a strain of anti-materialism, a dose of economic nationalism, interchange and regard for the USSR, all doused in hefty foreign exchange controls. These shackles held India back whilst providing the writer ample opportunity to travel, house and feed himself on US$10 a day.
On another visit, undertaken at the end of that decade, the country had begun to move on, if slowly. During a game of golf at the Willingdon Sports Club (founded in 1917 by the first Marquess of Willingdon) the writer’s host, a director of the Raymond Group of companies, bemoaned India’s lack of competitiveness “we can try but China is basically the winner in many industries”. Sentiment on that count has been transformed in the subsequent 20 years and these days businesspeople tout the great relative advantage of India in its demographics.
Being successful in India required the skilful working of contacts an inside view and the exhaustive study of government regulations, permits and import controls. Businesses, then and now, have to study a country as large as a continent with distinct variations, religious observances and cultural tropes. Only in the past few weeks has it been possible to consume a glass of beer in the city that is tagged to be India’s capital markets portal to world capital markets, Ahmedabad.
Narendra Modi was elected as Prime Minister of India in 2014, having been previously the governor of Gujarat and ascending to lead the BJP party.
The Bharatiya Janata Party or BJP was founded in 1980 to oppose the Congress Party, that party of many Gandhis, itself formed in 1885 to oppose British colonial rule.
Modinomics was predated by the administration of Prime Minister P. V. Narasimha Rao who, in tandem with Finance Minister Manmohan Singh, turned the tide of the Indian economy via liberalisation. When they assumed office in 1991, the budget deficit was 8.5% and foreign exchange reserves amounted to a mere US$1bn.
Modi’s premiership, since 2014, has extended these liberalisations, adding infrastructure, removing inter-state tariffs and taxes and initiated the digitisation of the economy. The great difference between digitisation is the US is that its initiatives will be the work of private companies like Microsoft and VISA, whereas in India it is the work of the national government. India’s successes in Digital Public Infrastructure (DPI) have been nothing short of stunning. For example, the number of people who have entered the financial economy in India in the past 10 years eclipses the total population of the US. The digital identification of each person is termed Aadhaar and the workings (money transmission) are collectively called UPI. Kakoli Laha provides a short and useful primer here1.
A modern-day visitor to Mumbai, the commercial capital of the country, cannot fail to notice the scale of commercial and residential building, nor indeed the scale of the various Ambani residences, cannot fail to travel on the new expressways which arc out to sea and will doubtless use elements of the digital economy.
The tea seller plying his trade from a hut off the Bandra shoreline was surprised – perhaps somewhat annoyed – to be offered cash for a cup of chai. Everybody else was availing themselves of the QR code posted on his shop window. Still served in disposable clay cups, but for INR20 in 2025 (17 British pence). Many years, back on the railway platform at Simla, the writer remembers paying INR1 for a cup of chai. The prevailing exchange rate then was INR30:£1 and the path of rupee depreciation goes a long way to explaining the persistent inflationary trend, which is more or less guaranteed for a country that imports 40% of its energy needs and within that 90% of oil.
The accepted view is that rupee depreciation continues and that it is tantamount to official policy as a means of retaining competitiveness. But need that be the case? China has remained competitive despite operating a quasi-peg to USD. The contrarian view that rupee depreciation could end is plausible and would have an enormous bearing on how foreign portfolio investors would view India. For no more would they require such a high hurdle on local currency returns, being predicated on the assumption that these are needed to offset currency losses.
On the credit side, India has long been a bank lending market and on the debit side, investors have traditionally preferred a mix of property, term deposits and gold. This has been changing in the past few years, spurred by great returns available on the Bombay Stock Exchange (BSE) and through the proliferation of investment products.
It is the season of the Indian Premier League (IPL), the world’s most lucrative cricket tournament with twice nightly games across the country, contested by city franchises backed by billionaire businesspeople. Royal Challengers Bengaluru, where Virat Kohli is king, sit top and Mumbai Indians are on a run. In the commercials, bookended by the oddities of Mark Wood, Jos Butler and Jacob Bethell speaking Hindi, local stars Rohit Sharma and Jasprit Bumrah are to be found commending mutual funds.
Capital controls, avid market appetite and high growth go some way to explaining the persistently high multiples of the Indian stock market and there is growing but pent-up demand for international financial assets.
Wealthy and tech savvy Indians have long had an eye toward the tech congregations on the East and West coasts of America. Expatriate Indians provide much of the talented work forces and a good spread of the CEOs there. But with America now hell-bent on retracting from the world and duffing up their aura, Indians will begin to look elsewhere as the Rest of the World finds new ways to combine and reduce their reliance on the US.
Ajay Garg, Managing Director of Equirus Capital, commented: “Trump could be doing us a favour. India can compete, so if we end up doing a trade deal and tariffs come down, then fine!”.
Apple announced it was switching iPhone assembly for all models to be shipped to the US to India as soon as 2026. The southern states of India are the prime beneficiaries as it is there that most electronic tech assembly is based.
Presently, each family member can port US$250,000 per annum offshore. The developing portal for this internationalisation is named Gift City, established in Ahmedabad when Modi was governor of the state of Gujarat. Gift City is neither well known nor well understood overseas but is now a subject of focus for domestic investment firms and US banking and broking joint ventures in the country.
A less mentioned plank in the Indian financial foundations is the credibility, intelligence and conservatism of the Indian regulatory bodies. The sense gained is that these institutions and the people working within them accrue some prestige, prestige entirely absent in the west.
It is this writer’s view that India’s Central Banking and regulatory financial management, top to bottom, outstrips that of most if not all of large Western nations.
What could go wrong?
The reminder came in a meadow in Kashmir on 22nd April when four gunmen murdered 26 tourists visiting from other parts of India. Prime Minister Modi’s policy was to run heavy security in Kashmir once he had removed it of its status as a state. The success of those policies promoted an influx of domestic tourists. In the days that followed, all the TV channels (bar those showing Indian cricket or English football) were providing blanket coverage, toggling from news updates to studio debates, screens clad with the tag “INDO-PAK”. Everybody has known what that abbreviation has meant since 1947, it entered the OED in 1948.
In one respect, this is little different from the intense debate that scored the writer’s first visit in 1990 when Kashmir was closed to all and only the hippies stationed in Manali could speak of their smoke-fugged memories of the place. On the other hand, India and Pakistan are heavily militarised, nuclear powers. And then there is the politics of water. Diplomatic understandings regarding the flow of water between India and Pakistan and India and Bangladesh have long been fraught and the April attacks were so egregious as to jeopardise these. A good primer on the water issues can be found here2. In the background you have China, who tactically and economically support Pakistan as a leveller (one presumes) to the might of India. China, by virtue of its control of the Tibetan Plateau, possesses the upstream advantage.
In Mumbai, in the aftermath of the attacks, seasoned political watches bemoaned China’s lack of criticism of Pakistan. “They could have played this smarter” was a typical comment.
Observers were of the view that, given the scale of the atrocity, India would seek to hit back and their response came on 7th May via a series of missile strikes by Indian air forces on sites in Pakistan and Pakistan administered Kashmir. Pakistan has called for corresponding retaliation and whilst the relative scale and strength of India means that they would prevail in any conflict, it is also the case that both sides will choose to avoid a war.
Our visit served to make clear the scale of opportunities that exist: the domestic story of financialization (a word that can only be spelt in US English) and the early stages of internationalisation of the domestic savings base. And that savings base is not a constant. It is growing at a clip. Bank deposits in India have grown at 10% per annum in the past 10 years and the value invested in mutual funds by 20% per annum over the same period.
James Spence
Managing Partner
Cerno Capital is discussing a series of cooperations with Equirus Capital, including servicing outbound capital from India and bringing an Indian equity strategy to the UK.
1 https://proteantech.in/articles/understanding-india-stack/
2 https://www.csis.org/analysis/can-india-cut-pakistans-indus-river-lifeline
Disclaimer: This document is issued by CERNO CAPITAL PARTNERS LLP (“CERNO CAPITAL”) and is for private circulation only. CERNO CAPITAL is authorised and regulated by the Financial Conduct Authority in the United Kingdom. This document is strictly confidential and does not constitute an offer to sell or the solicitation of any offer to buy any securities and or derivatives and may not be reproduced, distributed or published by any recipient for any purpose without the prior written consent of CERNO CAPITAL. The value of investments and any income generated may go down as well as up and is not guaranteed. You may not get back the amount originally invested. Past performance is not a guide to future performance. Changes in exchange rates may have an adverse effect on the value, price or income of investments. There are also additional risks associated with investments in emerging or developing markets. The information and opinions contained in this document are for background purposes only, and do not purport to be full or complete. Nor does this document constitute investment advice. No representation, warranty, or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained in this document by any CERNO CAPITAL, its partners or employees and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained in this document.