The India bulls are charging.
If the emerging markets universe had an anointed darling last year, it would be India — and the country’s momentum is still growing.
Net inflows into exchange-traded funds focused on Indian stocks shattered records in 2023, clocking in at $8.6 billion last year, according to Reuters. India’s NSE Nifty Index surged nearly 20% in 2023, handily outperforming the MSCI
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Last week, Indian shares hit new highs and the economy posted sizzling fourth quarter data, growing at 8.4%. A Reuters poll of leading analysts suggested that Indian stocks could gain another 9% this year. The iShares MSCI India ETF is up nearly 6% this year.
“There has been a cataclysmic change that has taken place in the last 5-6 years in India,” says Varun Laijawalla, senior portfolio manager for emerging markets for Ninety One, the London-based global investment manager.
He pointed to three major trends driving this change: digitization, rising manufacturing, and a property and housing sector set to boom, owing its success to regulatory reforms and a rising middle class.
“Those three changes permeate to where the equity opportunities are,” he said. He pointed to companies like Zomato, the online delivery platform, as emblematic of a changing environment with dramatic reductions in the cost of data and equally dramatic rises in the number of online and connected Indians.
The bullish India outlook is not new, though it seems to be gathering pace. In a widely quoted report from 2022, Morgan Stanley
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Morgan Stanley also noted India’s GDP could hit $7.5 trillion by 2031, more than double its 2022 figure, while also doubling its exports, and generating 11% in annual growth on the Bombay Stock Exchange.
A more recent report published by Global X, a leading emerging markets ETF issuer, described India as “the best structural growth opportunity in emerging markets, if not the world.” The report, authored by Malcolm Dorson and Paul Dmitriev, described India as “an oasis for investors, driven by growth, profitability and governance.”
Laijawalla points out that the confluence of rising middle classes and connectivity has created a new wave of opportunities. “Three or four years ago, there were not many internet businesses to invest in,” he says, but a new wave of entrepreneurs and “technology, access to the internet and platforms” have changed that dynamic. He also cited PolicyBazaar.com, the online insurance broker, as a fast-growing company riding this wave.
He acknowledges that India has “long been emerging, but never emerged,” but he points to 10 years of reforms under Prime Minister Narendra Modi that produced a growth environment benefitting Indian companies. “As long as Modi continues with reforms, and as long as he is able to wield power to push for those reforms, there is no reason why India cannot continue to grow,” he says.
Dorson, a senior portfolio manager for Global X, also sees government policy as crucial to the growth story. “Government spending has been productive and efficient and has translated to economic growth but also built the blueprint for many more years of growth because of the investments in infrastructure,” he says. Discretionary consumption is expected to grow 20% to 25% over the next eight years, he adds.
On the issue of high prices for Indian shares, he notes that valuations are trading in line with their seven year historical average, and have not bumped up dramatically over the past two years. “People should not look at valuations compared to other emerging markets. All of these countries have different dynamics. India is trading in line with its 7 year historical average. Multiples are lower than developed markets. There are opportunities to buy interesting companies,” he said.
Laijawalla agrees that “valuations are expensive,” though he says, “In India, you get what you pay for and it’s worth paying for. You don’t buy the market. You buy the companies. You must do the bottom-up work. I would caution against going passive in India. Stock-picking is key at this stage.”
Beyond public equities, another investment growth theme is emerging around private equity. That’s according to Sarah Alexander, a longtime leader in the industry, who also teaches a course on emerging markets at the Johns Hopkins School of Advanced International Studies, and runs the boutique advisory firm Private Capital Strategies.
“India private equity has matured significantly over the last decade especially over the last five to six years,” Alexander says. “We have seen a step change in the industry.” She points to the “multiple cycles in India” of private equity and venture capital that have trained a wide cadre of people and created an experienced group of fund managers.
Over the past three years, some $40 billion per year has flowed to these deals, representing a quadrupling in average deal volume over the prior decade. “This is a level that will be sustained,” Alexander says.
She also notes that investors should seriously consider private markets as the best way to get exposure to the fast-growing industries like AI and tech or consumer services or healthcare for the burgeoning middle class.
India private equity is also benefitting from China’s recent restrictions. “China’s restrictions on international PE investment has been significant and has caused many foreign fund managers to move shop,” Alexander adds. Asia funds are now searching more aggressively for India deals, she notes.
Like many analysts, Laijawalla and Dorson see Modi as most likely to emerge victorious from the upcoming national elections between April and May of this year, and begin a third term as prime minister. Laijawalla says that this gives the market “a level of certainty around growth profile in the market that you don’t have for China.”
Modi’s dominance of the political scene, however, has downsides, according to Indian historian Ramachandra Guha. In an article in Foreign Affairs, he argued that “the future of the Indian republic looks considerably less rosy than the vision promised by Modi and his acolytes.”
Guha wrote that the Modi government challenges the secular state in favor of Hindu exceptionalism, and has intensified “conflicts along lines of both religion and region, which will further fray the country’s social fabric.” He points out that “a principal source of India’s survival as a democratic country, and of its recent economic success, has been its political and cultural pluralism, precisely those qualities that the prime minister and his party now seek to extinguish.”
Guha is not alone in expressing those concerns Guha is not alone in expressing those concerns but markets seem to shrug them off. In a sense, both sides can be right: Social and religious cleavages may indeed be forming. Modi may indeed be adopting some autocratic tendencies. Yet, at the same time, a gathering storm of a series of factors —from improved infrastructure to Modi-led policy reforms to rising connectivity to growing middle classes to record-breaking investment — are driving new areas of growth.
For more than two decades, India’s Ministry of Tourism ran an “Incredible India” campaign. Today, it seems, there’s a new campaign led by investors, who are incredibly bullish about its future.
The bulls, it seems, still have more room to run.
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