Moving denominators! – Adjusting for hidden noise in inter-country comps
Minerva Asset Advisors | SEBI Registered Investment Adviser: INA000020332
Re-basing is required!
Our view remains unaltered on how poorly India stands on absolute value. Accordingly, for an allocator that isn’t hobbled by capital controls, in our view, India needs to make a compelling relative value argument for 1. Attracting capital, and 2. Retaining it. While headline multiples are casually tossed around for relative benchmarking, few comparisons are really as noisy as inter-country index comparisons. These get incrementally noisier when we compare benchmarks with high component attrition and/or meaningful underlying divergence between winners and losers. Effectively, stacking such benchmarks against themselves from years ago, or against others, needlessly attracts misplaced interpretations that are then used as planks to push through misplaced narratives.
Around the beginning of last decade, Energy, Materials, Financials, and Utilities (let’s say intrinsically ‘low-multiple’ sectors) made around 58% of MSCI EM, vs. 51% for MSCI India. Contrast that with today - composition of the same 4 has since marginally ticked up within MSCI India while it has nearly halved at MSCI EM (and more than halved if we were to exclude India from MSCI EM). From the context of evaluating relative attractiveness today, it’s therefore outlandish to evaluate how these benchmarks have correlated historically. Instead, a cleaner relative value read-through can only be had by comparing sectors with themselves and without altering weights of sectoral components historically (i.e. by using current weights). That is exactly what the boxplot in the below exhibit does. The sector-wise dispersion of relative Price-to-Book for MSCI India vs. MSCI EM (excluding its Indian components) is plotted out. We only included names that have traded since at least C2011. What stood out?
1. Relative to MSCI EM, 6 of the 11 Indian GICS sectors (highlighted in ‘red’ dotted lines in the exhibit) began this quarter trading at levels that were still in the top-quartile of their history, and
2. If one were to exclude the steroidal post-pandemic binge, only 3 of 11 Indian GICS sectors now trade below historical averages, and mostly deservedly so. Why? - Be it emergence of coding assistance tools or continued internalization of development within Fortune 500 clients, Indian software names aren’t exactly dealing with temporal headwinds. These challenges cannot be wished away. Elsewhere, Indian staples names are simply trading at less ridiculous levels than where they used to – Less expensive than ‘absurd’ is still ‘expensive’.
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