Over the past year India has been stealing investors’ attention away from the US, China, Europe, as a popular country to invest due to the strong performance of Indian equities, the impact of historic economic reforms and favourable demographics. With a general election looming in 2024, how long will this combination continue to fire Indian stocks?

The other question facing prospective and existing investors in Indian stocks is one of valuation. Analysts at Goldman Sachs said in July this year: ‘Indian equity markets are less likely to outperform its peers in 2023’ due to valuations looking expensive. In this article we address this issue, look at the broader outlook and consider how to invest.

HOW HAVE INDIA STOCKS PERFORMED?

India has been one of the best performing markets achieving gross returns of 12.8% over one year and gross annualised returns of 20.1% over three years, 13.2% over five years and 13.1% over 10 years (as of 29 September 2023), according to the latest data from the MSCI India index (denominated in local currency) and according to research from Morgan Stanley it is on track to become the world’s third largest economy by 2027 and have the third largest stock market by 2030.

The reason for its stellar performance has been India’s ability to boost its share in global manufacturing, expand its credit availability, create new businesses, and improve the quality of life for its growing one billion plus population (thus encouraging consumer spending in the country).

India is attracting investment from high profile international companies like Amazon (AMZN:NASDAQ), Boeing (BA:NYSE), Samsung and Nokia who are looking to India as a manufacturing alternative.

Chetan Ahya, chief Asia economist at Morgan Stanley says: ‘India will be one of only three economies in the world that can generate more than $400 billion annual economic output growth from 2023 onward, and this will rise to more than $500 billion after 2028.’

It is no surprise therefore that India is on the global investor’s radar. India’s current prime minister Narendra Modi has played a role in shaping India’s growing economy with his series of economic reforms, for example introducing the insolvency and bankruptcy code (IBC) which helped banks recover their debts.

Other factors which have made India attractive to global investors is demographics – with a growing and youthful population – more than 40% of Indians are under 25, according to the latest data from the United Nations.

‘A MULTI-DECADE’ GROWTH OPPORTUNITY

Ayush Abhijeet, adviser to the Ashoka India Equity Investment Trust (AIE) says: ‘A potential multi-decade growth opportunity is unfolding as per capita incomes rise, creating inflection points for various categories where India is at the lower end of the consumption curve.

‘Driven by the lowest data costs globally, the internet has democratised aspirations across 200 million-plus households which are at an early stage of adoption of many discretionary goods.’

India is also a democracy, albeit an imperfect one with a fair share of geopolitical tensions and internal religious divisions, and this usually reinforces property rights, helping to give greater confidence to overseas investors.

In contrast to India, the more authoritarian China has achieved of gross returns 8.6% over one year and annualised gross returns of -12.1% over three years, -2.9% over five years and 3.7% over 10 years (as of 29 September 2023). China’s population is not growing as fast as India’s.

Dina Ting, head of global index portfolio management with Franklin Templeton’s ETFs says: ‘China’s weaker-than-expected economic recovery furthermore appears to be lending positive momentum to Indian equities, especially among international investors who have favoured smaller, domestically focused companies.’

GLOBAL MARKETPLACE

The recent G20 global economic summit hosted in India catapulted prime minister Narendra Modi into the global spotlight – showing the world it was a credible economic superpower in the same league as China or the US.

Modi ‘took the opportunity to further promote several measures aimed at better integrating the ‘Global South’s’ developmental needs and ambitions with that of the G20,’ Franklin Templeton’s Ting says.

Ting adds: ‘Modi announced a new multilateral rail and sea corridor project to connect India with the Middle East and the European Union, describing it as a beacon of partnership and innovation.

‘In such an environment of shifting global political alliances, the trade pact stands to be a compelling counterweight to China’s vast Belt-and-Road infrastructure corridor.’

THE VALUATION QUESTION

For all their attractions, Indian stocks do trade at a significant premium to other emerging markets. The MSCI India index trading on a forecast PE (price to earnings) ratio of 20.1 times at the end of September compared with 11.6 times for the wider MSCI Emerging Markets index.

How do India-focused fund managers see valuations? Abhijeet says: ‘Relative valuations convey only half the story. Even as the premium to other emerging markets have expanded, compared to its own recent history, India’s multiples are close to average levels.

‘On a one year forward basis, the Sensex trades at 21 times earnings which is in-line with the average since 2014 when multiples reset higher. This observation also implies that higher relative multiples are driven more by derating of other large emerging markets such as China rather than any India specific re-rating.

‘It is also worth noting that when one talks about valuation and averages, it is generally about price to earnings or the price to earnings ratio while what we track is the multiple based on our proprietary cash flow centric OpCoFinco framework.’

In terms of mitigating this risk Abhijeet says: ‘We continue to stay fully invested at all times with a bottom-up approach to investing in great businesses at attractive valuations.’

Kristy Fong, senior investment director at Abrdn New India Investment Trust (ANII) acknowledges ‘some froth’ in certain pockets of the Indian stock market, particularly the small- and mid-cap space.

‘As such, we won’t be surprised if there is any profit-taking should there be a risk-off in market sentiments or a rotation towards markets that offer better value,’ she says.

However, she adds: ‘We remain confident that our portfolio, as positioned, has the right features to withstand the current challenging environment.

‘In the short-term, once the global interest rate cycle peaks, we believe that the growth to value rotation will ease or even reverse, and our resilient, higher-quality, growth stocks will outperform.’

ELECTIONS IN FOCUS

Something which could upset the apple cart in India is the general election expected to be held between April and May 2024. Modi, who has served as prime minister since 2014, is widely expected to prevail.

Abrdn’s Wong says: ‘The consensus view is that prime minister Modi and the BJP government will win majority, albeit at a smaller margin. That’s a view that we share as well. Political continuity will be much welcomed for Indian equities and India’s relations with the rest of the world.’

Ashoka’s Abhijeet says: ‘One of the reasons why India has commanded a premium over other emerging markets is because it possesses the soft infrastructure of a mature, stable democracy with strong separation of powers The general elections are about six months away. At this juncture, as per various surveys, prime minister Modi’s popularity rating is the highest globally. Thus, the markets would also be expecting continuity. However, as the saying goes, six months is a long time in politics.’

HOW TO INVEST IN INDIA

While retail investors cannot purchase individual Indian stocks there are still several ways to invest in India. One is through single-country funds focused on the market, for example, the aforementioned Ashoka India Equity Investment Trust has delivered a 177% return over five years making it the best-performing India-focused investment trust.

The ongoing charges for the Ashoka India Equity Investment Trust are low at 0.5%. Another example of an India single-country fund is Abrdn New India Investment Trust. Over the past five years it has delivered a total return of 56.7%. Its ongoing charge is 1.09%.

Investors can also gain exposure through India-focused exchange-traded funds (ETFs). For example, Franklin FTSE India UCITS ETF (FLXI) has returned 36% over a three-year period and has an ongoing charge of 0.19%.

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