Looking for 20%+ $ CAGR over 20 years? India has 20x of China/US/Japan: IIFL Capital Services

14 Nov 2022 , 11:58 AM

Key takeaways include:

• Industrials and Materials have done the best, but even the lowest return sector Real Estate, has delivered much more than equal-weight portfolios (EWP) from the other indices.
• Analysts at IIFL Capital Services show that Indian stock returns’ superiority is regardless of 20- year/10-year/5-year frame, or hit ratio measured on original index companies or current, or on EWP returns.
• A counter argument could be that India was a small market back then, but even now India is only 3% of global market capitalization. With a slowdown threatening major world economies, India’s superior record in generating long term multi-baggers will only improve.

India outperforms

In a 20-year period, 23% of BSE500’s companies generated 20%+ dollar CAGR versus 1% or fewer in the other 3 indices. An EWP in BSE500 would have returned 20% versus 5.3-9.5% in the others. In a 10-year period too, BSE500 has had the best hit ratio of 10%, despite US and China having mega cap internet companies blossoming during this time, and further, BSE500 EWP return is again the highest at 11.7% versus 5.5-10.7% for the others. In 5-year frame, BSE500 had the highest hit ratio of 12%, and nearly tied with US on EWP CAGR at 6.3%, with China and Japan EWPs giving negative returns.

Industrials and Materials shine

Sectorally, even 20-year wooden spooner Real Estate yielded 13%, >> other Indices’ EWPs. In 10/5 years too all but 3/11 GICS sectors beat EWP returns of China and Japan. Within BSE500, returns in Industrials and Materials have shone in 20/10/5 years. Generally, sectoral dispersion reduces as we lengthen the time frame, strengthening the argument for long term investing.

The best is yet to come

Several factors such as strong bank balance sheets and regulation, a decade of corporate deleveraging and a supportive policy environment will ensure that the outperformance will continue.

Summary of proportion of high performing cos in each index and the overall total returns from constituents — India trumps in almost all cases (20yrs/10yrs/5yrs)

Year	Country	Index	No of cos. in Index	% of cos. still in existence	% of cos. with >=20% CAGR	Index CAGR %
2002	India	BSE500	500	72%	23%	20.3%
USA	S&P500	500	55%	1%	9.5%
China	Shanghai Comp.	749	88%	1%	7.5%
Japan	Topix 500	495	74%	0%	5.3%
2012	India	BSE500	500	84%	10%	11.2%
USA	S&P500	500	76%	9%	10.7%
China	Shanghai Comp.	994	94%	3%	6.1%
Japan	Topix 500	501	93%	2%	5.5%
2017	India	BSE500	501	95%	12%	6.3%
USA	S&P500	506	90%	9%	6.5%
China	Shanghai Comp.	1,408	94%	4%	(2.2)%
Japan	Topix 500	500	96%	1%	(3.8)%

Source: Bloomberg, IIFL Research. Note: Index constituents taken as of respective years. % of cos. with >=20% CAGR based on total index members. CAGR based on total returns in USD terms. Pricing is done based on 10^th November 2022 prices.

If one takes current index members, BSE500 has the highest proportion of companies with at least 20% CAGR total returns over the last 5/10/15 yrs

Country	Index	No of cos. in Index	% of cos. with >=20% CAGR
20 yrs ago	10 yrs ago	5 yrs ago
India	BSE500	501	32%	22%	16%
USA	S&P500	503	7%	19%	14%
China	Shanghai Comp.	1,957	0%	2%	3%
Japan	Topix 500	500	1%	6%	4%

Source: Bloomberg, IIFL Research. Note: % of cos. calculated basis total companies in Index