Indian equities had one of the strongest five-year runs in its history until Sept. 2024, with the Indian market outperforming most other major markets up to that point. However, that marked a turning point. Since the end of September, the Indian market has given back much of its strong 2024 performance.
As long-term investors, with an average holding period of more than eight years, we would typically not look to comment too much on short-term market moves. There will always be short term fluctuations in markets, but we believe our Growth-at-Reasonable-Price investment approach has stood us in good stead over the longer run. We hope that clients investing with us share this investment horizon but would like to provide clarity about what has driven this performance, what the outlook is for India from here, and whether it’s a good time now to invest in India.
The fourth quarter of 2024 saw a culmination of unique shocks to the Indian equity market. Firstly, from a global macro perspective, Chinese government stimulus and the re-election of Donald Trump drove a change in sentiment for Indian equities from foreign institutional investors (FII); Indian equities became a funding source for trades into Chinese and US equities. This is borne out by the fact that October 2024 and January 2025 were two of the worst months for FII outflows on record.
To put this into scale, the $22bn in FII outflows the Indian market has experienced in the four months since Oct. 1, 2024, is of a similar magnitude to the sum of FII inflows seen in the previous 18 months. That is how sharp and severe this reallocation has been; foreign investor (FII) ownership is now at a 10-year low (16%). We have not seen the same shift in domestic investors who continue to invest at a rate of about $9bn per month.
Secondly, these macro factors have been compounded by softer economic and company earnings data due to prolonged impacts of India’s disruptive general election in the first half of 2024, and temporary bouts of food price-induced inflation and consequent higher interest rates. The recent rate cut by the Reserve Bank of India (RBI) combined with the significant tax changes announced in the budget will go a long way to addressing these factors, resulting in an increased formalisation of the economy and a likely higher tax take than previously.
Looking forward to the remainder of 2025, we see a horizon free of the heavy electoral cycle that weighed on growth last year, with the prospect of more money in the pockets of consumers, and expectation of continued interest rate easing, all of which ought to be supportive for equities. The main source of uncertainty is external; it remains to be seen how extensive the new US tariffs will be and what will be their impact on the global economy. So far, Trump has focused on the countries that have the largest trade surpluses with the US. India is not in that group, so there are good reasons to believe that it ought to be among the least affected countries.
In any case, the Indian economy has much lower dependence on trade than most economies due to the size of its internal market. It seems possible that once the tariff landscape becomes clear, foreign investors may revisit the Indian market, from a point where they have relatively little exposure and thus plenty of scope to grow it. Meanwhile, domestic investors, who are closer to the ground, continue to put money to work in the Indian stock market.
We think India remains one of the most exciting investment destinations on the planet. Its unique combination of attractive demographics and rapidly growing middle class, ongoing and effective agenda of government reforms, widespread integration and adoption of technology, and increasing formalisation of its economy have created a tailwind of long-term structural growth. Its businesses also tend to be efficiently run, with returns on equity for the MSCI India index in the mid-high teens, generally low levels of debt, and some of the highest forward earnings growth accessible globally1. And yet this recent pullback has seen valuations for the MSCI India index drop below their 10-year average (as at Feb. 25, 2024). At these levels, investors are getting the best car in the shop… on sale. We think that this could present an excellent opportunity for investors looking to access the compelling long-term growth available in the world’s most populous country.
Strategy specific risks
- Currency (FX) Risk - The Strategy can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
- Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Emerging Markets Risk - Emerging markets are potentially associated with higher levels of political risk and lower levels of legal protection relative to developed markets. These attributes may negatively impact asset prices.
- Market Concentration Risk (Geographical Region/Country) - Investing in a particular country or geographic region can cause the value of this investment to rise or fall more relative to investments whose focus is spread more globally in nature.
- Derivative risk - the Strategy may use derivatives to reduce costs and/or the overall risk of the Strategy (this is also known as Efficient Portfolio Management or "EPM"). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the Strategy.
- Liquidity Risk - Some investments may be hard to value or sell at a desired time and price. In extreme circumstances this may affect the Strategy's ability to meet redemption requests upon demand.
- Liquidity Risk (general) - During difficult market conditions there may not be enough investors to buy and sell certain investments. This may have an impact on the value of the Strategy.
- Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the Strategy's assets.
For a more detailed explanation of risk factors, please refer to the "Risk Factors" section of the KIDs (Key information documents).
Footnotes
1CLSA, January 2025 (FY27 over FY25), MSCI India vs. MSCI EM, MSCI USA, MSCI ACWI, MSCI China.
The value of active minds: independent thinking
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Important information
This marketing document is intended for investment professionals* and not for the benefit of retail investors.
This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Initial charges are likely to have a greater proportionate effect on returns if investments are liquidated in the shorter term.
Past performance is no guide to the future. Company examples are for illustrative purposes only and are not a recommendation to buy or sell. Quoted yields are not a guide or guarantee for the expected level of distributions to be received. The yield may fluctuate significantly during times of extreme market and economic volatility. Awards and ratings should not be taken as a recommendation.
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