25 September 2023
Rana Gupta, Senior Portfolio Manager
Koushik Pal, Director of India Equities Research
In this investment note, Rana Gupta, Senior Portfolio Manager and Koushik Pal, Director of India Equities Research, explain how India’s impending inclusion in the JPMorgan Government Bond Index- Emerging Markets (GBI-EM) index should lead to an increase in global inflows that will help underpin its current account, stabilise yields, and reduce the cost of capital, which would reinforce India’s transition to its next stage of growth and the case for considering Indian equities to participate in the long-term structural growth story.
The key takeaway from the release of the 2023 EM Index Governance Results is that from 28 June 2024, India will be included in the JPMorgan Government Bond Index-Emerging-Markets (GBI-EM) Global index suite, which encompasses all relevant derivative benchmarks, including custom indices1. India has been classified as “Index Watch Positive” since 2021 (for inclusion in the GBI-EM Global index suite). This development follows the Indian government’s introduction of its Fully Accessible Route (FAR) programme in 2020 and substantive market reforms to aid foreign portfolio investments.
Post inclusion, India is expected to reach as much as a 10% weighting in the GBI-EM Global Diversified index (GBI-EM GD), making it the second largest constituent member. At present, 23 Indian government bonds meet the eligibility criteria of the index, with a combined notional value of approximately INR 27 trillion/US$ 330 billion.
Inclusion in the GBI-EM GD will be staggered over a 10-month period that will conclude on 31 March 2025 (i.e., the inclusion of 1% per month)2 and is expected to generate US$30 billion in fixed-income flows.
The Indian government has introduced several structural measures to pivot from deficit to savings and consumption to investments. Its goal is to build a resilient and sustainable growth engine (refer to our latest thought leadership piece Transitioning to India’s next stage of growth). The fruition of these measures and India’s inclusion in the GBI-EM Global index suite is viewed as positive. More significant foreign inflows should help fortify its current account, which could help mitigate the impact of higher oil prices.
We believe the recent announcement and expected global inflows into Indian government bonds will help stabilise yields with some downside bias over the medium term. When combined with improvements in infrastructure and incentives, this should contribute to an ongoing reduction in the cost of capital. It also further supports our view that Indian corporate profits are on an upward trend. Indeed, the earnings per share (EPS) of companies in the NIFTY50 index rose from 5% (on a Compound Annual Growth Rate, CAGR basis) from FY2014-FY2019 to 12% FY2019-FY2023. We expect such growth rates to continue with a strong outlook for domestic-oriented companies.
Meanwhile, the inclusion is an added positive for wholesale-funded businesses, such as non-bank lenders and rate-sensitive domestic consumption; investment sectors like autos, capital goods, and real estate.
The Indian government’s policies and reforms that are put in place have laid the foundation and established a visible, long-term growth path. As the most populous country in the world today, this event is another step that gives India a greater presence on the global stage.
1 India gets green light to join JPMorgan bond index; rupee, bonds gain | Reuters, 22 September 2023.
2 Morgan Stanley, 22 September 2023.
Better income – Preferred securities
Over the past three years, preferred securities showed slightly higher volatility than US Treasuries, but less volatile than other rate-sensitive assets like US mortgage-backed securities (MBS) and US investment-grade bonds. Preferreds also demonstrated a relatively better return than US Treasuries, MBS and investment-grade bonds.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income: Global multi-asset diversified income
The Global Multi-Asset Diversified Income approach remains focused on generating higher, sustainable natural yields from a range of assets with lower correlations and expected relatively lower volatilities.
Better income – Preferred securities
Over the past three years, preferred securities showed slightly higher volatility than US Treasuries, but less volatile than other rate-sensitive assets like US mortgage-backed securities (MBS) and US investment-grade bonds. Preferreds also demonstrated a relatively better return than US Treasuries, MBS and investment-grade bonds.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income: Global multi-asset diversified income
The Global Multi-Asset Diversified Income approach remains focused on generating higher, sustainable natural yields from a range of assets with lower correlations and expected relatively lower volatilities.