Nilesh Shah, MD, Kotak AMC, says “if our governance standards falter like it has faltered in Russia, China, Brazil and South Africa, then certainly the premium valuation which we are enjoying will not be available. So as long as the 3G of growth, governance, and green is better than the peers, financial markets have a chance of staying ahead of the economic market as people discount the future and give higher weight to it. If we falter on any one of this, then certainly the financial market will be lower than the economic real GDP.”
Six years ago, we spoke about how India’s weightage in the MSCI Index was all set to go higher. China was the dominant one. And look at that tweet where we are just revisiting what he, in a sense, predicted. In this case, we can say in Hindi, look, he said it. So, Nilesh bhai, you said it. Now it is done.
Nilesh Shah: Yes it feels good that we could predict how India will rise and why global savings should come towards India rather than China. Obviously, a lot of work has gone in ensuring this. The reason why we had to engage with MSCI to increase our weight is that a lot of passive funds, almost $2 trillion worth today, follow MSCI emerging market benchmark.
If our weight goes up, we will receive more flows. All the other active fund managers, majority of them follow MSCI indices. In some sense, it is fair to say, higher the weightage in the index, higher the allocation out of global savings towards your country. If our weights would have gone down, then we would have not only lost future flows, but also people would have redeemed from their invested amount in India. And which is why it was important to engage.
I am really happy that our regulatory authorities did manage that proactively. And today, we have moved from 8% to 18% in six years. Whereas China, instead of going from 30% plus to 50% plus, is now 25%.
In terms of weightage in the next three-five years, can we go as high as China, which was 30% at peak?
Nilesh Shah: Never say never. We will all hope, pray and work towards achieving that. Of course, there are two immediate things which should happen and increase India’s weight further. One, Korea is considered as part of the emerging market. Their president, in their election campaign, has talked about Korea becoming part of the developed market. I hope and pray, at some point of time, a $35,000 per capita GDP country moves out of the emerging market into the developed market. If that happens, then the low double-digit weight of Korea will get divided among other emerging markets, including India.
The second thing which we have to achieve is that one of our banks is included at 50% weight in MSCI index. It should be included at 100% weight. Why give discounted treatment? If these two things happen over the next 6-12 months, we should see a reasonable increase in India’s weight. And if luck favours the teens, we will go into our 20s. Then the gap between us and China will narrow further.
Over the next five-six years, there is a reasonably good chance that if we maintain our economic growth and valuation, then we should be where today’s China’s weight is.
Do you see that in the next three to five years, the financial market economy will be growing at a rate which will be significantly higher than the real economy? If India, let us say, doubles in five, six or seven years, when the real economy becomes $4 trillion to $8 trillion, the financial market economy will achieve that at least a year or a year and a half before the real economy doubles.
Nilesh Shah: In some sense, when our financial market or financial market cap is higher than the real economy, it is factoring in the future. The world believes that India’s growth rate will be better than its peers. Its governance standards will be better than its peers. And probably somewhere not discounted, but believed, is that the green transformation of India will be better than its peers. Today, China is the world’s largest contributor to environmental issues. The carbon emission is the largest in China. On per capita basis, India is the lowest per capita carbon emitter. Of course, China on a per capita basis is not the highest. That honour goes to the developed world. Now we will have to remain the lowest per capita carbon emitter. Our growth should happen without damaging the environment. If we continue to maintain this trend of going above our peer group, having governance standards at par with developed world and better than emerging market and doing green transformation where India continues to remain lowest per capita carbon emitter or in the lowest decile or quartile of per capita carbon emitter, then I have no doubt in my mind that as our economic size doubles, financial market cap or markets will probably remain higher than the economic size.
If someone says, this is India’s Amrit Kaal. I want to stay invested. But market’s at an all-time high and valuation’s at an all-time high. Financial markets have already seen a runup. Could there be a situation where the economy will continue to grow. The stock market could lag the economic return? Could it happen the other way around?
Nilesh Shah: Undoubtedly, even that can happen. If our future economic growth starts falling or faltering vis-à-vis our peers, then certainly the premium valuation which we are getting today in the 20s will not be available. If our governance standards falter like it has faltered in Russia, China, Brazil and South Africa, then certainly the premium valuation which we are enjoying will not be available. So as long as my 3G of growth, governance, and green is better than my peers, financial markets have a chance of staying ahead of the economic market as people discount the future and give higher weight to it. If we falter on any one of this, then certainly the financial market will be lower than the economic real GDP.
