India’s equity market is outpacing the S&P 500 index over a one-year, two-year and three-year time frame, and this is despite the performance of the ‘Magnificent Seven’ stocks and other AI related names in the US equity markets.
These gains have seen India grow from just 8.4% of the MSCI emerging markets index at the end of 2020, to form over twice that amount at 20%.
Over the past twelve months, India has more than doubled the returns of the wider MSCI emerging markets index: up 36% versus 15%.
Although this momentum in Indian equities was briefly stalled by a market sell-off following Modi’s Bharatiya Janata Party’s (BJP) failure to win a widely expected landslide at the polls, investors are still optimistic on the region.
After initially hitting an all-time high on early indications of a sweeping BJP victory, Indian equities fell as much as 8% after a narrower than expected win.
However, in the weeks following, the market clawed back the losses and continue to climb higher.
Although some investors are questioning whether the pace and direction of the country’s economic reforms will continue, global asset managers are less phased by the potential policy uncertainty.
For Niraj Bhagwat, equity portfolio manager at Wellington Management, his base case for India is policy continuity.
He pointed out that India has had a history of coalition/minority governments from 1989 to 2014, and in many cases with the main political party having far fewer seats than the BJP has today yet the coalition governments were still able to push through reform measures.
“We believe the macro case for India has only grown more compelling, supported by powerful demographic trends, increasing urbanisation, rising wealth, export growth, geopolitical tailwinds and a supportive policy regime,” he said.
“We believe these forces are coming together to drive a new corporate profit cycle in India, which we think is likely to continue for the next five to six years.”
“This is coinciding with the end of the deleveraging cycle that has been playing out since 2015, meaning companies are likely to be in far stronger financial positions than they were a few years ago.”
Indeed, the election outcome appears to be influenced more by local and non-economic issues, according to David Chao, global market strategist Asia Pacific ex-Japan at Invesco.
“This leads me to think that the planned reforms that have already been put in place – aren’t going to change,” he said. “I would expect that the focus remains on getting these reforms implemented and executed over the next five years rather than any policy pivot.”
A buying opportunity
Julius Baer head of research Asia Mark Matthews believes the election sell-off in India was “an entry opportunity to those who do not own it yet.”
“Unquestionably, changes made over the past ten years to the way that India is run have put the economy on a strong footing,” he said.
Although the market is concerned that fewer resources will be available to fund further infrastructure development and reforms may not get pushed through, Matthews also believes the BJP’s power despite being diluted, is “still intact”.
“Momentum in the economy from the existing reforms is still strong and will not fade away,” he said. “GDP’s growth in the January-March quarter at 7.8% y/y confirms an economic upcycle that we believe has several more years to go.”
Not all asset managers are quite as bullish however, Kunjal Gala, head of global emerging markets at Federated Hermes is underweight India due to the lack of margin of safety in valuations.
“Generally, companies that benefit from structural growth drivers (as opposed to government policy), with solid balance sheets and credible management, will do well, provided they are trading at reasonable valuations,” he said.
“We remain opportunistic and will assess companies in our inventory that we could not invest in the past due to high valuation as the situation becomes apparent on the political/macro front.”
He added: “Over the long term, reforms are crucial, and we are somewhat sceptical now that structural reforms in complex areas such as the farm sector and the Electricity Act will get done.”
