In 2021, the Indian Sensex outperformed the MSCI Asia ex Japan Index, rising 20.8% in US dollar terms.
Large inflows from domestic retail investors and a number of high-profile listings of new economy companies played a part in propelling the market higher last year, Anand Gupta, portfolio manager at Eastspring Investments, said in a report.
“We believe that there are both near- and longer-term factors that make the Indian market attractive for investors as the Indian economy regains its growth mojo,” Gupta said.
India is one of the most diversified equity markets in Asia, with sizeable sectors that derive revenues from both within and outside of India. This provides significant opportunities for stock pickers to add alpha and is also one of the compelling reasons for investors to have an exposure to Indian equities in their portfolios, according to the report.
For investors who can go off the beaten track, non-benchmark stocks can offer significant outperformance, Gupta added.
India’s valuations are not cheap, but a strong earnings recovery could potentially provide some offset, he said. “We expect earnings to rebound from a low base, after being weighed down by multiple one-off events in the last seven years.”
Sector preferences
Going forward, there are opportunities in many sectors as digitalisation drives new business models. The information technology sector is a major beneficiary as it is an enabler of this transformation, not just in India but globally.
Digitalisation will be an important growth and earnings driver going forward, Gupta said. In the last five years, India added 480 million internet users. The pandemic has also accelerated the adoption of digital channels in many sectors. Ongoing digitalisation also enables new sectors such as ed-tech, fintech, e-commerce, creating more jobs.
At the same time, there are opportunities in old economy sectors such as real estate – with the housing affordability ratio at its lowest in 14 years, home purchases have never been so accessible.
A recovery in the real estate sector can have a multiplier effect – on banks’ asset quality and their ability to lend, on consumption from the positive wealth effect, as well as on related industries including construction and cement, according to the report.
Meanwhile, with coal accounting for 70% of the country’s electricity source, the Indian government has been ramping up its investment in renewable energy. Favourable policy, the private sector’s increasing focus on ESG and growing price competitiveness are expected to drive India’s solar module manufacturing capacity.
