India's Stock Market Boom

Investors around the globe have turned their sights towards India, marking a significant shift in the markets away from China.

For several decades, markets made bets on China being the world’s biggest growth story. But as China’s economy falters, India has emerged as the prime investment destination.

However, global investors' desire to own a piece of the emerging world's brightest market has led to an underestimation of its vulnerability and risks.

The chief risk is the level of expectations.

India and China

Investors are closely watching the economic performance of India and China, two of Asia's most powerful nations. India, under the leadership of Prime Minister Narendra Modi, has been rapidly expanding its infrastructure to attract global capital and supply chains away from Beijing. Meanwhile, China faces persistent economic challenges and a growing divide with the Western-led order.

One appeal for investing in India is that it is simply not China.

The two markets diverge.

Investors have been bullish about India for some time. However, they are now more likely to see a market that resembles China's economy in the past, which was vast, dynamic, and opened up to global money in unique ways.

Although nobody expects a smooth ride in India, most investors are still making the crossover anyway, despite the country's population still being largely poor, stock markets being expensive, and bond markets insular. They believe that the risks of betting against India are greater.

Capital Inflows

The $4 trillion Indian stock market is pulling in billions of dollars worth of domestic and foreign money as investors flock, brushing aside risks around overpriced shares, upcoming elections and regulatory uncertainty. More on these later.

A steady flow of cash into the stock market from regular retail investment plans, currently averaging $2 billion a month, and buying by domestic institutional investors have been tailwinds for strong performance. The benchmark NSE Nifty 50 Index surged 25% in the past 11 months and attracted $20 billion in foreign investments in 2023.

Asset allocation rotates.

During the last quarter of 2023, the primary US exchange-traded fund for Indian stocks, iShares MSCI ETF, experienced unprecedented inflows. In contrast, the four largest ETFs for investing in China saw outflows of almost $800 million.

Since 2022, active bond funds have invested 50 cents in India for every dollar they withdrew from China.

Election Risks

The allure is also rising this year as expectations grow that national elections will see current Prime Minister Narendra Modi return for a rare third term, especially after his party’s sweep of recent state polls signalled existing policy would continue.

His 10-year run as PM correlates to the eight straight years of annual gains in local shares. But a weakened ruling party could jolt markets in the short run.

To be sure, investors are bracing for possible short-term volatility with this event, so the Nifty's rise may be less linear. As markets look to hedge the risk, implied stock volatility (NIFVIX) is rising.

This risk poses the biggest threat to India’s equities over the foreseeable future. We view it as a lower-probability, high-impact event in which Modi loses power.

On Jan. 5th, we highlighted other elections to keep note of this year. That article can be found here.

Manufacturing Boosts

Many people see China as a threat to how things are done in the Western world, but India is seen as a potential solution to that problem. India is becoming more and more able to compete with China in terms of production, and this makes other countries, like the US, interested in doing business with India.

Although some have criticised India's tax policies, it's still a good idea for countries to have strong business relationships with India. In fact, more than 7% of the world's iPhones are made in India, and the country is investing a lot of money into improving its infrastructure.

The Indian government is planning to position the country as a global growth leader. In order to do so, they are increasing their spending on infrastructure by 11%, which amounts to around $134 billion.

Questions Are Being Raised About Valuations

For the rest of this article, let’s take a look at the valuations and prospects for India over the next ten years.