As someone who has been extolling the potential of the Indian economy and equity market for decades now, it has been great to see India getting more attention recently. The G20 summit, a Morgan Stanley report predicting India may become the third-largest in the world by 2031, and the Indian equity market hitting a new all-time high are certainly the kind of events that get people talking. To some extent this is a case of perception catching up to reality, but there’s no denying that India has seen a positive momentum shift in recent years – what’s been driving that?

India’s government is fiscally strong

The economic policies during Covid and post-Covid meant that India, along with some other emerging markets, didn’t do the ‘helicopter drop’ of money into the system and that’s contributed to a comparative lack of inflation pressure (core inflation was 4.9%1 , compared to annualised economic growth of 7.8%2 ). In the midst of that, company profits have been growing quite rapidly coming out of Covid as evidenced by advance tax numbers (in India, people and business pay tax quarterly in advance) for September which are 20% higher than last year’s.

With the government in a relatively strong fiscal position, it has been able to respond effectively to the global economic situation with targeted action on specific areas where stimulus or help has been most needed (for example the provision of basic foodstuffs to around 700-800 million people), rather than scrambling to put out fires everywhere at once like we’ve seen in many developed markets.

Investors must keep their heads

As mentioned above, I’m a big believer in the bull case for India – but as investors, whether in developed or emerging markets, we must always keep an eye on the risks and make sure our portfolios are as insulated as they can be from the potential for shocks. In India’s case, such risks include the strength of the US dollar and especially the possibility that oil prices get out of control. High oil prices would be a problem for many countries, but it’s especially relevant for India, which is one of the world’s largest importers of oil.

Another thing worthy of note is that the equity market has been hitting new highs. As specialists in Indian equities that’s something we naturally welcome to an extent, but it’s important to look at how the market got there. Company earnings growth in India is actually pretty strong (forecast for 15%) but the market has been running ahead of that, to the extent that most companies in the market are becoming more expensively valued. We are valuation-conscious investors looking for ‘growth at a reasonable price’ so that means we need to be more discerning in our search for opportunities that the market may have so far overlooked.

Who’s buying Indian equities?

With Indian stocks attracting more buyers, it’s reasonable to wonder where they’re coming from. International investors were in aggregate pulling money out of India last year, and still were as recently as March this year. Domestic investors, on the other hand, have been putting vast sums into the Indian market on a monthly basis thanks to a new generation of investors (in their 20s and 30s) becoming financially active in a way they weren’t before. This cohort are making long term investments via their pension contributions, or their monthly saving plans, into Indian equities and as more people sign up that increases the money entering the market.

Taken all together, the strong fiscal position of the government, India’s excellent demographic position, the modest inflation, the healthy economic growth and the technical underpinnings of a growing pool of investors entering the market make, in our view, a compelling case for why investors should pay close attention to India as an investment destination. As mentioned earlier, they are risks that must also be considered, and it’s the job of active investors to help guide their clients through that and make the most of the available opportunities.
1 India Core CPI Change | 2012 – 2023 | Economic Indicators | CEIC (ceicdata.com)
2 India GDP Annual Growth Rate – 2023 Data – 2024 Forecast – 1951-2022 Historical (tradingeconomics.com)

The value of active minds: independent thinking

 

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