His column caught the attention of Indians working on Wall Street, which led Morgan Stanley to hire him in its Mumbai office. In a 25-year career at the firm, he rose to become head of emerging markets and chief global strategist. At Morgan Stanley Investment Management, Sharma built a system for evaluating the relative attractiveness of developing countries based on “10 rules,” or criteria that matter to economic and market performance—population, for instance. Since economic growth is a function of people and their productivity, demographic changes affect output: Aging societies tend to grow more slowly. Other criteria include inflation, politics and debt.
Sharma continued to write columns as well as books including The 10 Rules of Successful Nations and, most recently, What Went Wrong With Capitalism. After leaving Morgan Stanley in 2021, he became chairman of Rockefeller International, an arm of Rockefeller Capital Management, and founded investment firm Breakout Capital. On an afternoon in September, Sharma, 52, sat down with Investing & FFM editor Jon Asmundsson at Breakout Capital’s office in Rockefeller Center in Midtown Manhattan. Debarati Roy, an FFM editor on Bloomberg’s news product team, joined the conversation, which has been edited for clarity and length.
JON ASMUNDSSON : What do you see as opportunities or risks in India? Maybe we could just go through your 10 rules and see where it stands now? Starting with population.
RUCHIR SHARMA : If you look at the demographics, India’s still relatively OK. The big challenge the rest of the world is today facing is that you have a collapse in the population growth rates, right? There are about 50 countries in the world today where the working-age population is actually shrinking. That number in the 1980s, for example, was two or something. So it’s really accelerating very quickly. China is the epitome of that, just falling off a complete cliff, the working-age population growth turning negative.
India’s population growth rates, too, have slowed down. In India, this is taken as a bit of a mixed blessing because India is always freaked out about its population growth rate, and of late the big issue has been unemployment. But generally I would say demographics is still one of India’s relative strengths.
What we typically do here is that for all the countries in the world, we score each one on each of the rules. And then we come up with a composite at the end of the day.JA : This is a heat map? Your universe is all emerging markets? Frontier markets?
RS : Yes, all emerging and frontier markets. Fifty of them, we rank them systematically that way. The whole idea is, which of these are likely to do well over the next three to five years and which are not likely to, both in terms of growth and equity market performance? The model’s origin was that I built this back at Morgan Stanley. We’d have portfolio managers who’d go and visit various countries and they’d come back and say, “Oh, this looks good. That doesn’t look good.” My idea was, let’s systematize this. What matters? You know, like some people speak, “Oh, this country’s education system is not good.” But does it really matter from the investment horizon, which is 3, 5, even 10 years? Or are these like 50-year things?
JA : You’ve written about how education doesn’t matter. Yet the fact that China has such a huge pool of engineers—that must make a difference, right?
RS : Yes. But the way that we see it is that it comes in things like research and development spend and stuff like that—it’s captured somewhere else. But the idea that you can model which country has a good education system and so therefore that country’s growth rates are likely to be higher, we just didn’t find statistical evidence that this works on a 3-, 5-, 10-year horizon. Maybe it works on a 50-year horizon, but it barely moves the needle otherwise. And the whole concept behind this is that what matters is the rate of change. Is the rate of change positive or negative? To cut a long story short, on demographics, India ranks relatively well.
Then we get to politics. Just objectively what our rules show is that typically a country performs the best, especially its stock market, in the first 6 to 18 months of a new leader coming to power. And the longer a leader stays in power, the more diminishing the returns. By the way, this is true for America as well, that the second-term returns are far inferior to the returns in the first term of a president.
In that regard, India’s got a government that’s pretty much been there for a long period of time. I’d still say the government at least has done a decent job in terms of maintaining macroeconomic stability. If you look at the fiscal, the inflation performance, those are OK. But any new reform ideas for boosting economic growth, I think that those have sort of dried up. So just objectively, on the second rule, you find that the ranking would be relatively low.
JA : And the third is state?
RS : Yeah, state intervention. There, what we find is that the government in India generally tends to be quite interventionist. But it’s not overly. It’s not like an Indonesia or something where the government is all over you. It’s a bit on the interventionist side but not excessively so.
DEBARATI ROY : Interventionist—has that been the case throughout? Or, because the government has been in place for more than 10 years now, do you think that is increasing?
RS : I think it’s increasing in a very different way in India, which is that in India I find the real problem is the overzealousness of the regulatory agencies. The state intervention there is a lot: That is the real negative. It’s not intervention so much elsewhere, but I mean the regulatory agency intervention is what we find is a bit concerning. A lot of private investment is almost a bit scared of that. The natural impulse is to invest, but then you don’t know when what notice will be served on you for what reason.
JA : Is that true for enterprises within India? Or are you talking about people investing from outside?
RS : No, I’m talking in general. But I’d say that for enterprises in India, it’s more so. There’s a lot of uncertainty about that. It would be a score somewhat on the lower side.
On debt, I think India’s situation is relatively OK. It’s slightly concerning from the states in India where the debt’s going up because they’re running deficits. But the center—the debt-to-GDP ratio, the general fiscal situation—is OK. The private sector also: I don’t see a case of too much indebtedness. So there the score will be relatively decent.
Then you come to investment. I think the picture is a bit mixed here. The government’s investment has been relatively strong in building infrastructure and doing things. The private investment is on the lower side, hasn’t really picked up much. The foreign investment is very low, but the government’s investment has been pretty strong and focused on infrastructure.
Then we look at inflation, and here the performance is pretty decent. You know, no one in any country will tell you that they’re happy with inflation unless you have zero inflation. For emerging markets, a rate between 3% to 5% is what we find is normally good. I would give India pretty decent marks on its inflation performance.
JA : It has been rising, though.
RS : A bit because of oil prices, but the inflation trend in India is pretty stable. Consumer prices have risen a bit because of oil. Outside of oil, it’s been quite stable the last couple of years. The whole idea here is to come up with a relative snapshot because everywhere you see rising oil prices having an impact. In India, I think the inflation rate is relatively well-behaved.
Then we come to geography. Here is a bit of a problem. One big structural issue for India has been that it has one of the lowest intraregional trade rates in the world. India barely trades with its neighbors—its relations with its neighbors aren’t great. That is a big negative, because normally if you look at the big successful economies, they tend to reside in geographies where they trade a lot with each other. East Asia was that. So here the rank is relatively low.
The next thing is the so-called billionaire rule that I developed.
DR : That’s the interesting one.
RS : We look at that as a measure of how much wealth is being created and is it being created in the right sectors, in the wrong sectors. Here, India’s score is also a bit mixed because the billionaire share of wealth as a percentage of the population in India is very large, among the highest in the emerging world, right? That’s not a great sign, because normally if you have too much wealth— I mean, I’m all for wealth creation—but if you get far too much excess, it generally builds some resentment against it.
JA : I added up the Indian billionaires on the Bloomberg Billionaires list, and it’s a total of $600 billion, about 15% of India’s GDP.
RS : The average is closer to 10% or so for emerging markets. It’s definitely on the higher side. Not as extreme as the US, but I’d say that India is on the higher side among emerging markets. So that would be a relatively lower rank for us.
And then the two other things we have, one is currency. Normally we like cheap and stable currency. We looked at this as far as India’s concerned—the currency behavior really is a very interesting pattern. Since 1991 the way the currency behaves in India is that you end up getting these long periods of stability and then you get a very sharp adjustment. And then you again get a long period of stability and a sharp adjustment.
And except for the boom period of 2003 to 2008—the one time the currency actually appreciated against the dollar—all the adjustments have been down. The good news for now is that this adjustment period seems pretty much close to the end. Normally we like investing in currencies which are relatively cheap but stable. You don’t want to keep buying a currency that is plummeting down.
JA : The depreciation over the past five years, do you consider that stability?
RS : No, I’m saying the depreciation was bad. But I’m saying we seem to be at a point near the edge. The average adjustment when you get these tends to be about 15% to 20%. You get stability, 15% to 20%, stability, 15% to 20%. We seem to have now been at the end of that adjustment period. So this could be followed by a period of stability.
I’m less concerned about the exchange rate than I was a couple of years ago. Generally, I feel that the dollar is going to be weaker around the world. I feel that the currency score now is in India’s favor, that we could be entering a period of stability now—unless there’s some big macroeconomic shock—which could last a couple of years until the next adjustment happens. That could coincide with these big [foreign currency savings] deposits that banks have raised when they mature three years from now—that’s when you could see the next cliff. But for at least the next couple of years, it seems like the currency should be in a decent spot.
And the last rule I have is more of a contrarian rule: We like countries where sentiment is sort of indifferent. I don’t want to buy countries where there’s too much hype going on or to buy countries where people hate them, because normally you hate them because they’re going through a crisis.
Here India’s score is sort of mixed. On one hand the foreign investors are totally indifferent towards India, which is almost good, from a contrarian standpoint. The problem in India—and this goes back to why it’s so difficult as a foreign investor today to invest—is that because you have this very robust flow of domestic money going into Indian mutual funds and the Indian asset management industry, the valuations of the Indian market remain very high, especially the mid- to small-cap stocks. As a foreign investor, it’s not attractive because all these domestic guys keep bidding up the market to valuations which are not seen anywhere in the world. If you look at the mid- to small-cap space, India’s got possibly the highest of any country in the world. Those companies trade at about 25 to 30 times earnings.
The trapped money has no choice but to keep putting money in there. But I, as a foreign investor, why do I have to do this? I can go somewhere else, get a better valuation and better earnings growth in the middle of an AI boom. On one hand the fact that foreign investors’ sentiment is indifferent is something I’d like. But on this I’m like, not really, because there’s the valuations.Now I’m going to put these 10 rules together and aggregate them. You can see there are positive scores on things like inflation, on the currency. Demographics also are in the positive score. But the others: You have negative as far as politics is concerned, the billionaire skew. And then you have a lot of scores where India is in the middle. Investment, it’s sort of middling. Sentiment is middling, given the dichotomy between foreign and local sentiment.
So when I look at my countries, India’s score is somewhere in the middle. And that’s India for you. My favorite line on India, which has become a bit of a cliché, is, India is a country that consistently disappoints the optimist and the pessimist.
DR : This is something I would hear all the time and I was like, “That’s Ruchir’s, right?”
RS : That’s been my view on India—that it does disappoint both ways. So definitely in India to come up with a uniform narrative is difficult.