India coming to the fore

Solid economic fundamentals and growth policies make India a compelling investment destination

Despite global volatility and turbulence, 2022 was a year of landmark achievements for India’s securities markets and economy. Its total stock market capitalisation reached US$3.21 trillion on March 11, 2022 to displace the UK as the fifth largest in the world. And the International Monetary Fund forecast last September that India’s economy would also overtake the UK to become the fifth largest after the US, China, Japan and Germany.

The Bombay Stock Exchange’s Sensex index tracking the 30 largest companies listed on the bourse was up 4.4% year-on-year in 2022, and the National Stock Exchange’s Nifty 50 index tracking 50 companies covering 13 sectors of the economy gained 3.25%.

By contrast, other key Asian markets suffered losses, some in double-digits. Japan’s Nikkei fell 9.4%, Hong Kong’s Hang Seng Index lost 15.2%, and China’s Shanghai Composite shed 15.1%. 

In the US, all benchmark indexes saw their heaviest losses since the 2008 financial crisis. The Dow Jones Industrial Average fell 8.9%, while the S&P 500 declined 19.44%, wiping out almost $9 trillion in capital, and the technology-heavy Nasdaq plunged 33.1%.

Initial public offerings in India were also robust last year. There were 134 new listings on Indian bourses raising over $8 billion in total, including $2.7 billion by Life Insurance Corp of India, one of the country’s biggest ever lPOs. It was a continuation of the strong performance in 2021, which saw 138 new listings and $15 billion in fundraising. 

Meanwhile global IPO activities shrank 45% to 1,333 last year from 2,436 in 2021, with proceeds plunging 61% to $179.5 billion from $459.9 billion, according to EY Global IPO Trends 2022.

Some analysts say India’s stock markets have been a beneficiary of China’s woes. Chinese stocks have been plagued by regulatory crackdowns on the technology and private tutoring sectors, Beijing’s strict Covid-19 policies, and concerns over the country’s worsening economic health. China’s geopolitical issues with the US have also driven some foreign investors to India. 

There are now nearly 11,000 foreign portfolio investors (FPIs) in Indian markets, with another 2,000 anticipated to enter in the next three years. These investors have poured nearly $70.6 billion into Indian stocks over the ten years from 2013 to 2022, and their holdings exceeded $655 billion or 18% of the total market cap as of end-December, according to data from National Securities Depository Limited’s FPI Monitor

But foreign capital can be fickle. FPIs pulled out a total $33.6 billion from Indian stocks over nine consecutive months from October 2021 to June 2022 amid tightening financial conditions, US dollar strengthening, and concerns around a global economic slowdown. Their net outflow last year was $16.5 billion, marking the fourth pullout since the global financial crisis in 2008. 

Large domestic market

Rapidly growing domestic participation helped Indian markets to weather through 2022. Instead of triggering a market collapse like in 2008, foreign divestments in 2021/2022 were offset by fresh investments from Indian investors. This was in spite of the fact that the total foreign divestment was four times more than in 2008.

“India’s economy is relatively insulated from global spillovers compared to other emerging markets. This is partly because India has a large domestic market and is relatively less exposed to international trade flows,” the World Bank said in a report in December.

Millions of domestic investors are now using their smartphones to buy shares or trade derivatives using low-fee online brokerages, moving their money from low interest rate fixed deposits at banks and into the higher returns of stock markets. The number of stock investors surged past 100 million in 2022 from only around 41 million before the Covid-19 pandemic. This is only a small fraction of India’s 1.4 billion population. 

Apart from picking individual stocks, retail investors have been adding $1.5 billion per month to systematic investment plans (SIPs), which allow them to invest a fixed amount in mutual funds at pre-defined intervals. At the same time, local accredited investors have helped alternative investment funds grow at a compound annual rate of 50% from 2018 to 2022.

Political stability

India’s steady economic progress under Prime Minister Narendra Modi has been the key pillar supporting stock market growth. Political stability over the past eight years has allowed monetary and fiscal policies to come together to support a range of economic reforms, remove structural rigidities, and make it easier to do business. 

“India’s economy has been remarkably resilient to the deteriorating external environment, and strong macroeconomic fundamentals have placed it in good stead compared to other emerging market economies,” the World Bank said in the December report. 

India’s gross domestic product is expected to have grown to $3.53 trillion in 2022, a 73% jump from $2.04 trillion in 2014. In 2021, the country vaulted to 63rd spot in the World Bank’s Ease-of-Doing-Business Ranking from 142 in 2015. 

The Modi government’s digitalisation push is making headway in various sectors of the economy, such as payments, banking, finance, taxation, e-commerce, agriculture, rural development, and governance. This offers opportunities for players to pivot and embrace the digital market, allowing new business models to thrive.

India has also emerged as the third largest ecosystem for start-ups globally after the US and China, with a steady stream of rising entrepreneurs. There are now over 69,000 start-ups in India, with 85 having achieved unicorn status as of end-2022 even after the latest valuation markdowns. There were 21 new unicorns in 2022 and 44 in 2021, valued at a total $26.99 billion and $93 billion, respectively.

India’s stock markets have also taken a giant step forward by converting securities to T+1 settlement in phases since February 2022, aimed at improving market liquidity and reducing settlement risks. Backed by robust technology and banking solutions, over 4,500 securities have migrated seamlessly to date with the rest expected to do so by the first quarter of 2023. 

Another Modi brainchild, a mega project called the Gujarat International Finance Technology-City (GIFT City) announced in 2015, has begun to operate. India’s first special economic zone, it is a global financial and information technology hub in Modi’s home state of Gujarat, with smart infrastructure, advantageous tax rules and relaxed currency restrictions. Foreign investors participate in the securities, gold and commodities markets in GIFT City under one unified regulator, the International Financial Services Centres Authority. 

GIFT City is envisaged as a global financial hub benchmarked against Singapore, London and Dubai, and India’s new gateway to connect to global opportunities. It aims to generate employment for one million people when fully completed.

Dedicated allocation 

The South Asian nation’s attractive growth story has increasingly prompted foreign investors to upgrade Indian stocks into a dedicated allocation in their emerging-market investment portfolios, a status hitherto only accorded to China. Bond investors are also anticipating India’s inclusion into global indexes by J.P. Morgan and FTSE Russell, which were held back in 2022 due to operational issues. 

But the global headwinds that plagued markets in 2022 will continue to create high levels of uncertainties and turbulence, and India’s stock market fortunes may shift. The pendulum may swing back to China if it successfully re-opens after dropping Covid-19 restrictions and its economic growth recovers. 

As of December, Indian market valuations were priced at a premium of more than 130% over the emerging market index, and this is difficult to sustain. There is growing concern about a major market correction and the massive number of investors who will be affected. India’s central bank has revised down its 2023 growth forecast for the country to 7% from 7.2%.

In spite of the potential short-term adjustments, India’s solid economic fundamentals and steady growth through economic reforms make the country a compelling destination for long-term investment. It has the lowest correlation to China among major equities markets in Asia. Indian companies in the main stock indexes mostly cater to domestic consumers or operate in export sectors such as software which are not strong areas for China. This means foreign investors will increasingly evaluate Chinese and Indian stocks on their own merits rather than as rotational plays.

*This article was published in Asia Asset Management’s February 2023 magazine titled “Upgrading India”.