India Emerges as a Stock Market Powerhouse
India's stock market ascends, surpassing Hong Kong to become the world's seventh largest bourse As China slows down, India shines bright What lies ahead for this emerging powerhouse?
Abhay Agarwal, the fund manager, was taken aback by the sudden influx of calls he received this month from international investors who were showing significant interest in India. "These calls are coming from family offices in Europe and some major investors in the US who have never previously shown any interest in investing in India," explained Agarwal, the founder of Piper Serica Advisors based in Mumbai.
"This is the first time I've seen them so serious. They're calling and asking important questions like, 'Will my money be safe?' and 'Is there a rule of law here?'" he added.
The increased interest coincides with the country's stock market reaching record highs, with the market value of companies listed on India's exchanges surpassing $4 trillion in late November, according to Refinitiv.
India has two main stock exchanges: the National Stock Exchange of India (NSE) and the BSE, which is Asia's oldest stock market previously known as the Bombay Stock Exchange.
The impressive surge in market activity has resulted in the NSE, with its higher daily transaction value compared to the BSE, surpassing Hong Kong to become the world's seventh-largest stock exchange, according to data from the World Federation of Exchanges.
India's stock market value has risen significantly, now ranking behind only the United States, China, and Japan, according to Refinitiv. Agarwal commented, "People are getting excited about India," and noted that investors are inquiring whether it can deliver returns similar to China in the early 2000s.
Over his thirty-year investing career, Agarwal has observed significant optimism from the global community towards India, primarily from short-term investors. However, for the first time, he is noticing a shift towards interest from long-term investors, both strategic and financial, who are approaching with a 10-year perspective rather than just focusing on the short-term.
India's Sensex index, which monitors 30 large companies, has surged by more than 16% this year, while the broader Nifty 50 index has seen a jump of over 17% during the same period.
In addition, India's stock exchanges are experiencing a surge in Initial Public Offerings (IPOs). In the first nine months of 2023, the country witnessed 150 IPO listings, as reported by Ernst & Young. In comparison, Hong Kong had 42 listings during the same period.
India shining, China stalling
The surge in Indias stocks is a reflection of the strength and potential of the worlds fastest growing major economy, analysts said.
The International Monetary Fund is forecasting a 6.3% growth for India this year, but there are economists who predict the growth to be closer to 7%. India's economy, which is the fifth largest in the world, grew by 7.6% in the quarter ending on September 30, surpassing the estimates of the country's central bank. As a result, both Citigroup and Barclays have increased their annual GDP projections for India to 6.7%.
India is being looked at with positivity, while China is facing investor concerns due to weak consumer demand and a prolonged real estate crisis. This is reflected in the stock market performance, with China's Shanghai Composite down 7% and Hong Kong's Hang Seng Index dropping nearly 19% this year. Stephen Innes, managing partner at SPI Asset Management, noted the sharp contrast in the performance of Chinese equities, which started the year optimistically but saw a disappointing second half. This shift occurred after China eased pandemic-related restrictions earlier in the year.
"The contrasting growth of India and China is crucial in the competition for investment flow in emerging markets," he noted. Despite potential economic challenges in China affecting growth prospects for other Asian countries, analysts believe India will continue to demonstrate resilience.
Goldman Sachs stated in a November report that the Indian economy has the lowest economic connection to China's end demand. Additionally, Indian equities show the least price sensitivity to the slowing growth of China in the region.
Furthermore, the world's most populous country is also less responsive to other global economic risks, partly due to the increasing influence of domestic institutional and retail investors in India.
Goldman Sachs believes that the market will be supported by domestic flows, reducing the potential for significant downside risk from global factors. In a December note, Nomura also stated that India is less susceptible to a global trade slowdown and could serve as a counter-weight to North Asia in the event of a Western slowdown and continued disappointment in China's recovery efforts.
Nomura stated that India houses several high-quality stocks, albeit with high price tags. The country is also expected to benefit as more companies look to diversify their supply chains away from China. Apple has notably increased its production in India following supply chain issues in China.
According to a recent survey by the Japan Bank for International Cooperation, the South Asian nation has emerged as the "most promising medium-term business destination" for Japanese manufacturers. China, on the other hand, has been relegated to the second spot due to its economic slowdown and escalating tensions between Washington and Beijing.
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Whats coming next?
Despite India's recent economic growth, foreign investors may avoid the country in the first half of 2024 due to the upcoming general election scheduled for April and May. "In the short-term, election-related uncertainty and the challenging global macro environment may result in weak foreign flows over the next 3-6 months. However, we anticipate foreign flows to increase after the election uncertainty subsides," stated Goldman Sachs.
Market analysts are optimistic about a potential victory for Prime Minister Narendra Modi's ruling Bharatiya Janata Party, which would ensure political stability. The likelihood of this outcome is high, as Modi has gained increased power and popularity since assuming office in 2014, while his opponents have dwindled in influence.
However, not all economists are optimistic about India's future, with some warning of an impending slowdown.
According to Alexandra Hermann of Oxford Economics, "Private consumption has stayed resilient thus far. However, with a portion of it being driven by debt and the labor market facing challenges, this year's spending might have adverse effects on consumers in the coming year."
The public sector may struggle to counteract this slowdown due to high government debt levels. In order to maintain investor confidence, the government will need to demonstrate fiscal prudence. Critics argue that the current strength of the stock market is not a reliable indicator of India's struggling economy, which is facing challenges in creating suitable jobs for its large working-age population and achieving sustainable and inclusive growth.
The profitability of large firms in the country has increased for a variety of reasons, while small and informal firms are struggling. However, only the larger firms are publicly quoted on the stock market, leading to a skewed perception of the overall economy, as stated in the recently-published book "Breaking the Mould" by former central bank governor Raghuram Rajan and economist Rohit Lamba. They also noted that high-employment sectors with numerous small firms, such as apparel and leather, have experienced a decline in recent years.
