If India’s stock markets seem to be running away, there are good reasons for it. Amidst a global slowdown, the economy and the corporate sector promise to perform reasonably well, raising the prospect of strong earnings growth. The confidence in India as a good investment destination stems from the sound macro-economic fundamentals and superior demographics in a politically stable democracy. In the offing is an upturn in the capex cycle as more sectors are being thrown open to foreign and private players. Schemes like production-linked incentives are expected to boost production and create jobs. This combination of a stable economy and a large universe of well-run companies have convinced fund managers from around the globe that India is where the money is to be made. True, the Indian markets are relatively small when compared with those like the US but there are good businesses to bet on.
Well-known strategist Chris Wood has chosen India as his favourite Asian market and the one where he wants to be for the next 10 years. That’s not surprising at a time when the Chinese economy is slowing. Most emerging market (EM) money managers are now overweight on India in their Asia portfolios and underweight on China. And they’re walking the talk. Foreign portfolio investors (FPIs) have pumped in a net $16 billion into equities so far in 2023, the most in three years. Back home, unattractive real interest rates on bank deposits have seen savers plump for mutual funds that have seen inflows into equity schemes for 30 months on the trot now. Asset management companies are raking in record sums as SIPs every month; in August, they hit a high at nearly `16,000 crore. Much of the local money has gone into mid-cap and small-cap schemes making the rally a broad-based one. In fact, the benchmark Nifty hasn’t done much this year having returned about 10.5% though it has gained more than 65% in the last five years.
Investors are now betting on many more companies than ever before. Thanks to the increasing formalisation of the economy, post the pandemic, the organised sector has been taking away share from the informal sector. As such hundreds of companies in sectors such as electrical products, paints, and food products now enjoy a bigger market share that’s driving up their revenues and profits. Again, the rising disposable incomes of the affluent classes—and also the middle class to some extent—has seen a move towards premiumisation with companies selling more upmarket products , be it cars or shampoos. With both banks and companies having cleaned up their balance sheets there is now room for a fresh round of capex; bank stocks have been the biggest gainers in recent months.
Some fund managers have red-flagged what they believe is irrational exuberance, especially in mid-cap and small-cap stocks, pointing out that in many cases the fundamentals have worsened. They could be right—there is probably a bit of a disconnect between the fundaments and the narrative at this point. While the benchmarks may be reasonably valued—at 20,000, the Nifty trades at a shade below 19 times estimated FY25 earnings—stocks are trading at very rich, even stratospheric, valuations. This could trigger a correction and some consolidation in the near term. However, there’s no denying that India today is among the most promising investment destinations.