India’s $4 trillion stock market has become a magnet for both domestic and foreign investors, drawing in billions of dollars as they seek a robust alternative to the challenges faced by China. Despite concerns about overpriced shares, impending elections, and regulatory uncertainties, the market has witnessed a surge in investments, propelling the benchmark NSE Nifty 50 Index by a significant third over the past 10 months.
According to data from India’s national depository, the market has seen an influx of $20 billion in foreign investments in 2023 alone. This heightened interest in India is partly fueled by global investors seeking alternatives to the struggling Chinese markets. Additionally, with expectations of Prime Minister Narendra Modi securing an unprecedented third term in the upcoming national elections, India’s appeal has soared.

Investors, seemingly undeterred by the elevated market valuations and potential political surprises, express confidence in the long-term prospects of the Indian market. Vikas Pershad, portfolio manager for Asian equities at M&G Investments, emphasized, “The recent rally notwithstanding, the upcoming elections notwithstanding, I think India is a good market for long-term investors.”

The steady flow of cash from regular retail investment plans, averaging $2 billion monthly, and buying by domestic institutional investors have provided crucial support to the market. Goldman Sachs predicts the Nifty index, currently at around 22,000, to reach 23,500 by the end of 2024, while ICICI Securities expects a nearly 14% jump.

Despite becoming one of the world’s most expensive markets, with a 12-month forward price-to-earnings ratio of 22.8 for the Nifty 50, three times that of China’s, investors anticipate Nifty earnings to grow at a compounded annual rate of 16.3%, according to ICICI Securities.

However, some financial experts caution about potential underestimation of risks associated with India’s market. Remi Olu-Pitan, head of multi-asset growth and income at Schroders, pointed out, “Whilst longer term we like India, we completely agree with the growth story, we just worry the market might not be pricing some of the risks that are brewing at the moment.”

The International Monetary Fund (IMF) predicts India’s GDP to grow by 6.5% in 2024, surpassing China’s growth estimate of 4.6%. Investors brace for short-term volatility, especially around the upcoming elections, and the rising implied stock volatility indicates growing concerns.

Nilesh Shah, CEO of Kotak Mutual Fund, stresses the importance of considering both India and China in the market context. He warns that if other markets start performing well, India’s premium valuation could be challenged, necessitating consistent earnings growth.

With domestic ownership of Indian stocks at 35.6%, exceeding foreign ownership at 16%, the Securities and Exchange Board of India (SEBI) remains cautious. SEBI has asked asset managers to stress-test mid and small-cap funds and tightened scrutiny of offshore funds with concentrated holdings in local stocks.

The looming May election remains a significant concern for investors. While Prime Minister Modi’s popularity and expectations of his party maintaining a parliamentary majority are high, a weaker-than-expected result could impact the government’s ability to implement economic measures, potentially affecting market sentiment. Hemant Mishr, CIO at S CUBE Capital, views the political risk as a “low probability, high impact event,” capable of significantly influencing India’s investment landscape.

Photo ( The Economic Time )
By: Delino Gayweh
Serrari Financial Analyst
February 5, 2024