Yes, we expect an inflection point in growth after seven disappointing years

India is the second-largest populated country in the world but over the past seven years it has underperformed its growth potential. We turn bullish on earnings growth after five years (anti-consensus), backed by our unique 4 Keys framework. From an average 6% earnings growth over FY15-19, we estimate Nifty earnings could grow c15% in FY21-23 in our base case, and c20% in our upside scenario (14% contribution to EM earnings growth vs 5% in the past three years). This growth acceleration, not discounted by broader markets, should have profound implications not only for local but also for global companies. 30+ UBS strategists and analysts explore the implications, including capital flows (foreign equity inflows potentially up 7x to US$40bn/year in our upside case).

4 Keys framework: property, exports, credit cycle supportive but not policy

Our 4 Keys framework (exports, policy, capex, and credit growth) of our top-down earnings view benefits from bottom-up rigour. Rising divergence between earnings and GDP growth makes this pertinent. We believe India's golden opportunity lies in exports. Capex: private and public capex may underwhelm but the property cycle will likely revive, with any policy support a bonus. The credit cycle should be supportive as a repaired and recapitalised banking system emerges. Policy (fiscal and monetary) will likely be neutral but at least not a drag on growth, unlike the past five years.

Higher GDP growth too, with stable INR/rates. ASEAN can benefit

The 4 Keys could drive a GDP growth recovery to 6.4% on average in FY21-23E. INR and interest rates could be well supported too, also by capital flows. India is the third-largest economy in PPP terms but mainstream EM economy exports are small; yet it could contribute c20% to global GDP growth (upside), with ASEAN a key beneficiary.

Foreign and local capital flows to drive local equities

Our top-down model for foreign portfolio inflows suggests US$20-25bn of net equities inflows annually, 3x the five-year historical average. AUM for equity mutual funds in India could go up 2x to US$280bn in our base case; 3x in our upside case. This also helps in making risk-reward for Nifty attractive, with 20% upside by Dec-2021 in our base case.

Political economy moving from repair to growth; material downside risks too

The policy bias is changing from repair over the past few years to growth. Unlike earlier near-term growth-disruptive reforms (GST, anti-corruption agenda, banking system clean-up), current ones (corporate rate cut, labour reforms and a privatisation push) are supportive. There remain material risks too, with tail risks in the banking sector not yet resolved, apart from global risks. In our downside scenario, we assume earnings growth could continue to languish at c7%, real GDP growth remains sub-5% till FY23, Nifty is down 20% from current levels by March 2022 and there are foreign portfolio outflows.

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