-Over 3 billion euros entered funds and ETFs on the Indian stock market in the first quarter of 2024.
-India’s economic growth has surpassed that of China and estimates predict an increase in the gap between the two Asian powers.
-The Morningstar India index has risen 37% in euro terms over the past year, beating emerging markets.
The Indian elections are in full swing and will end on June 1st. In the meantime, however, investors seem to have already “voted” for the Mumbai stock market.
According to Morningstar estimates, over 3 billion euros entered European funds and exchange-traded funds (ETFs) specializing in Indian stocks in the first quarter of 2024. In the period considered, organic growth (flows in relation to initial assets) was 9.6%, for assets under management of over 37 billion euros (32.5 billion at the end of 2023).
With the exception of the first three months of 2023, the net inflows of India equity funds have always been positive since the third quarter of 2022. But what should investors expect from the general elections which will bring more than 900 million citizens to the polls?
Modi is favored to win
“Indian elections are notoriously complex and difficult to predict, but after a decade of solid growth, the consensus suggests that Narendra Modi will secure a third term,” says Amol Gogate, manager of the Carmignac Portfolio Emerging Discovery fund. “If Modi is re-elected, there will likely be a turning point in India’s growth story.”
Other managers and observers also have few doubts about the probable reconfirmation of Modi and his party, the Bharatiya Janata Party (BJP). Chetan Sehgal, portfolio manager of the Templeton Emerging Markets fund, predicts that the current Prime Minister’s victory is very likely. Jason Hollands, Managing Director of the investment platform Bestinvest is also on the same line, recalling that in this case it would be one of the longest periods of political stability in India since independence.
The Indian economy will beat China’s again
The country has overtaken China in terms of economic expansion in 2023 and it is expected that the gap could widen. In the World Economic Outlook in April, the International Monetary Fund estimated an increase in real gross domestic product (GDP) of 6.8% in 2024-25, while the former Celestial Empire is expected to grow by 4.6% this year. In 2023, the IMF has estimated an increase in India’s GDP of 7.8% against +5.2% in China.
Furthermore, the government’s monetary policy, supported by the Reserve Bank of India, has contributed to keeping inflation under control (the IMF forecast is +4.6% for this year) and the social and welfare reforms promoted by Modi have favored development.
Is the Mumbai Stock Exchange overvalued?
If the economic numbers do not cause particular concerns, the rally on the Mumbai Stock Exchange (+36.9% in euros in the Morningstar India index in the last year to 7 May 2024) has already generated some fears and with this the speculation that stocks are now overvalued.
Index chart
However, Gogate throws water on the fire, arguing that a Modi victory would lay the foundations for an acceleration of the economy and would keep India attractive in the long term for two reasons:
- The internationalization of financial markets: the inclusion of Indian government bonds in the JP Morgan GBI-EM emerging markets index in June 2024 and of Indian bonds in the Bloomberg EM local currency index in September could raise up to $40 billion of foreign investments, according to Carmignac.
- A financial system that encourages entrepreneurship. “In this phase of rapid expansion, investors can find interesting and innovative companies in many sectors, including financial services, high-end manufacturing, specific consumer segments and real estate,” concludes Gogate, who however invites to pay attention to the valuations of individual securities.
What are the risks for investors in the Indian market?
In the short term, Modi’s victory is already a given in market expectations. The elections, therefore, should not cause large fluctuations in prices unless a surprise result worse than expected for the BJP party. On the other hand, his confirmation would immediately put him face to face with the need to keep his promises, first of all that of growing the GDP to 5 trillion dollars by 2027 from the current 3,700 and attracting foreign investments under the program “Make in India”.
“Key themes of the BJP manifesto include expanding access to welfare, job creation and further investment in infrastructure, such as plans to extend the reach of high-speed trains,” explains Bestinvest’s Hollands .
Still in the short term, however, investors must be aware that other factors could influence the financial market. Being a net importer of oil, for example, it could suffer inflationary pressures linked to the increase in crude oil prices. Furthermore, to continue growing, Modi will have to boost exports. In this direction, negotiations are underway with both the European Union and the United Kingdom.
Apple and Tesla are heading to India
India also faces the challenge/opportunity of being a major beneficiary of many companies reducing their dependence on China’s supplies. Apple (AAPL), for example, is said to be close to an agreement with two Indian companies (Titan and Murgrappa) to assemble the components of the iPhone camera. “Apple has already significantly shifted production to India, where it produced 14% of its iPhones last year,” says Hollands. “Another company believed to be eyeing expansion in India is Tesla (TSLA), which is expected to announce major investment plans following cuts to electric vehicle import tariffs made by the Indian government last month.”
The reasons for caution on the Mumbai Stock Exchange
In 2023, the Indian stock market significantly outperformed the emerging markets, recording a rise of 20.8% in euros, against +7.7% of the Morningstar emerging markets index. Even from the beginning of 2024 it is in an advantageous position (+10.4% vs +7.3% as of 6 May 2024). Some managers, therefore, urge caution.
“India offers investors a significant growth opportunity due to its structural factors, including attractive demographics, a market-oriented economy and a growing middle class. However, these strong growth prospects are reflected in the valuations of many stocks, which trade at a premium to other emerging markets,” says Franklin Templeton’s Sehgal. “We remain selective in the companies we invest in and favor those that have sustainable earnings power and whose share prices are at a discount to our estimate of their intrinsic value.”
How to invest in the Indian stock market
Investors interested in the Indian stock market can take positions through both active funds and ETFs. Among the active funds available in Italy to retail investors, 11 have a positive Morningstar Medalist Rating at the time of writing. In the table, we report the five with the best performance over the three-year period (the data is annualised). Two of these earned Silver ratings in the classes reviewed in this article. These are Robeco Indian Equities and Wellington India Focus Equity Fund. The others have a Medalist Rating of Bronze.
Funds table
Among the ETFs, at the time of writing, only one has a positive Medalist Rating (equal to Gold): Franklin FTSE India UCITS ETF (FLXI), which also has a Morningstar Star Rating of 4 stars.
