Charts of the Month

CHART 1 – A WORTHWHILE PREMIUM?

Historically, Indian equities (light blue line) have enjoyed a valuation premium over their Chinese (red) and Brazilian (dark blue) counterparts.

But the gap has narrowed recently with India suffering its worst 12 months performance, relative to other emerging market stocks, in 30 years.

This is partly due to the resurgence in demand for Chinese equities, but primarily because the Trump trade war has exposed India’s trade vulnerabilities; it runs a structural current account deficit so trade disruption can quickly impact growth and financial flows.

However, geopolitical tensions appear to be easing.

In January, the EU and India concluded their largest ever trade pact, which was soon followed by a reset of US/India relations, resulting in lower tariffs.

This looks set to spark a recovery in investor sentiment that could cause the valuation premium to reassert itself.

CHART 2 – REBASE & RERATE?

Buoyed by Prime Minister Modi’s reforms, India is projected to become the world’s fourth largest economy in 2026, overtaking Japan and bearing down on Germany.

India benefits from having the world’s largest, youngest and most digitally-native population. This is a powerful structural tailwind and Indian GDP was recently rebased to better capture the modern reality of an economy that has shifted significantly to capital-light, high productivity sectors over the past decade.

This all adds to the burgeoning narrative that India could finally be on the verge of unlocking its huge growth potential, but it needs a cyclical upturn to do so.

Encouragingly, as the chart below shows, the economy is starting to witness accelerating GDP growth at levels that surpass expectations.

CHART 3 – FRAGILE EM NO MORE?

India is traditionally perceived as a structurally high-inflation economy, requiring persistently tight monetary policy.

But that is starting to change.

CPI inflation has trended lower over the past decade (blue line) and its current reading around 3%y/y would not look out of place in the likes of the US or Europe.

Critically, this has allowed borrowing costs (red line) to trend lower (apart from a brief rebound during the 2021/22 global inflation scare) which, in turn, removes a major impediment to growth.

This suggests the Indian economy is transitioning from a “fragile EM” towards a more stable reality.

Which matters because India’s previous equity bull markets were repeatedly interrupted by macro instability, borne of currency stress, rate spikes or inflation shocks.

CHART 4 – RUPEE REBOUND?

The Indian Rupee has depreciated consistently for almost two decades, raising a red-flag for any foreign investor considering investing in the country.

Last year’s sell-off was compounded by record foreign investor outflows caused by the US trade war and renewed interest in Chinese assets.

However, increased domestic buying of stocks and all-time high FX reserves helped to prevent a major financial crisis from brewing and this has left much less reliance on the “kindness of foreigners”.

It would be a brave call to say this dominant trend of Rupee depreciation is over.

But its valuation has fallen to a 12-year low (on a real-effective exchange rate basis), which provides some comfort for overseas investors who are considering buying Indian assets.