Sector Insights from India’s Equity Market
Key findings
- Our dispersion indicators suggest that India’s equity market has provided fertile ground for active stock selection within sectors.
- The MSCI India Index’s sectors have offered higher returns compared to the sectors in the MSCI Emerging Markets and World Indexes, which were earned at the cost of higher risk.
- Since 2003, the MSCI India Index has traded at a valuation premium to EM, driven by almost all sectors.
Global investors seeking exposure to India's equity market have two main options. They may make a broad allocation to emerging markets (EM) with an overweight to India or they may allocate directly to India. The latter could be executed using various strategies, one of which is sector investing.
Using the MSCI equity-factor model for India, we decomposed the cross-sectional volatility (CSV), a measure of return dispersion, of the MSCI India Investable Market Index (IMI). We observed that the stock-specific contribution to CSV dominated the market's returns for most of the last two decades. Over this period, bottom-up stock selection offered opportunities to add active return. For managers with a top-down allocation budget, industries contributed more to CSV than style factors for most of the 2000s, with the trend reversing after that.
We discuss in this blog post several insights from our analysis of the Global Industry Classification Standard (GICS®)[1] sector exposures in India's equity market. These insights may be helpful for investors implementing a targeted India allocation using a sector-investing strategy.
Sector exposures differ from those of EM
An awareness of individual markets' sector exposures can aid diversification when constructing global portfolios.
Since 2000, the MSCI India Index has provided higher risk-adjusted returns versus the MSCI Emerging Markets Index. The outperformance relative to the EM index was primarily driven by the financials sector. Over our sample period, from January 2000 through December 2023, financials was the best-performing sector in the MSCI India Index on an absolute basis, with its weight growing to 26% with 27 constituents. As of December 2023, the second-largest sector was information technology (IT), with close to a 13% weight and nine constituents.
We also compared the sector exposures of the individual markets in the MSCI Emerging Markets Index. As with India, financials was the largest sector in most of the EMs; exposure to growth-oriented technology stocks was more limited, however. Taiwan had the greatest exposure to the IT sector, followed by Korea and India.
Third-highest exposure to IT among EM
Data as of Dec. 31, 2023. The markets analyzed are the constituents of the MSCI Emerging Markets Index.
Limited exposure to state-owned enterprises
State-owned enterprises, or SOEs, are often concentrated in sectors with strategic importance for the state.[2] The ownership structure of an SOE could be a source of risk compared to a privately owned enterprise, depending on the SOE's governance structures and policies.
As of Dec. 31, 2023, the MSCI India Index had fewer SOEs (18% of constituents) compared to the MSCI Emerging Markets Index (34%). The financial sector had the most SOEs (seven) with a market capitalization (market cap) of USD 144 billion, 21% of the sector's market cap, compared to SOEs' composing 59% of EM financials. The highest proportion of market cap (54%) in SOEs in India was in the utilities sector, compared to 77% in EM. Notably, the MSCI India Index had SOEs in only six sectors compared to the MSCI Emerging Markets Index, which had SOEs in all sectors.
Only six GICS sectors had an SOE
As of Dec. 31, 2023.
Higher returns but with higher volatility
We compared the annualized returns and risk of the sector indexes of the MSCI India, Emerging Markets and World Indexes. Almost all Indian sectors earned higher absolute returns — but at the cost of higher risk — relative to sectors in EM and DM. The exception was communication services. The risk was especially high in real estate and communication services. Stocks in India's consumer-staples and health-care sectors had lower volatility compared to the parent index.
In all three markets, the communication-services sector indexes underperformed the respective parent index. India's real-estate and communication-services sector indexes had the lowest average number of constituents over the sample period, resulting in concentration risk.
Real estate and communications services had highest risk
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Data period is from Dec. 31, 1999, to Dec. 31, 2023. MSCI sector indexes are used for the MSCI India, World and EM Indexes, calculated using daily returns in USD. The India real-estate sector index's start date is Nov. 27, 2019, and the EM and world real-estate sector indexes' start date is Aug. 31, 2016.
Intra-sector correlation in cyclical and defensive sectors
Understanding the degree of correlation between sectors can aid sector allocation. We analyzed the long-term active-return correlation between the cyclical and defensive sectors in the MSCI India Index. As expected, the sectors within each group were more closely correlated than sectors across the two groups. An exception was the IT sector, which had lower active-return correlations with all other sectors. Its differentiated industry composition and high exposure to international revenues were primarily responsible for this result.
IT in India tended to hedge other sectors
Data period is from Dec. 31, 1999, to Dec. 31, 2023. Gross returns are in USD. The benchmark is the MSCI India Index. Correlations are calculated based on daily active returns. The India real-estate sector index's start date is Nov. 27, 2019.
Most sector valuations were rich at year-end 2023
Comparing sector valuations across markets as well as relative to their longer-term averages can be an important reference point for investors as they make decisions about whether to rotate in or out of a specific sector.
We looked at the long-term price-to-earnings ratio (P/E) of India's sectors relative to EM sectors and to their historical values. The MSCI India Index has traded at a valuation premium to EM for more than two decades. At the end of December 2023, interquartile ranges suggested the same was true for most sectors relative to their EM counterparts. Current valuations are also above the top quartile of the distribution for most sectors, with the IT sector one of the exceptions.
Sector valuations relative to EM
Data period is from April 30, 2003, to Dec. 31, 2023. The relative forward price-to-earnings ratio is relative to the MSCI Emerging Markets Index and its respective sector indexes. India in the plot refers to MSCI India Index. The India real-estate sector index's start date is Nov. 27, 2019.
Most Indian equity-market sectors were trading at forward P/Es above their historical long-term median and above their top-quartile range.
Intra-market sector valuations
Data period is from April 30, 2003, to Dec. 31, 2023. The India real-estate sector index's start date is Nov. 27, 2019.
A sector-based perspective of the Indian equity market indicates that as of year-end 2023 most valuation premiums were high in historical terms and relative to EM. We also found these sectors offered an opportunity set with lower exposure to SOEs compared to sectors in other EM. These sector-based insights may inform portfolio-construction decisions for investors seeking to add exposure to the Indian equity market.
1 GICS is the industry-classification standard jointly developed by MSCI and S&P Global Market Intelligence.2 “State-Owned Enterprises and Corruption: What Are the Risks and What Can Be Done?” Organization for Economic Cooperation and Development, Aug. 27, 2018.
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