Market views: are asset owners eyeing Indian equities?
Structural reforms, a stable economic outlook (pandemic notwithstanding), and an IPO boom are fuelling a stock market rally in India that analysts say could have Indian equities post their strongest performance since 2017.
The BSE (Bombay Stock Exchange) Sensex closed 69.33 points (0.12%) higher at 58,247.09 on Tuesday (September 14) while the Nifty 50, which comprises the 50 largest Indian companies on the National Stock Exchange, rose 24.70 points (0.14%) to 17,380.00, after hitting a record high of 17,438.55 during the day.
An IPO boom has stirred investor interest: Indian startups raised over $8.8 billion in IPOs between January and August this year – more than the combined amount raised over the past three years. High profile public listings include food delivery platform Zomato, which had a 38.25-times oversubscribed initial public offering (IPO) in July.
Digital payments unicorn Paytm has also filed for a ₹16,600 crore ($2.2 billion) IPO, which would make it India’s largest public listing to date. Other upcoming listings include GIC-backed e-commerce startup Flipkart, which intends to go public by the fourth quarter of 2021 and online education provider Byju, which aims to raise $400-$600 million ahead of its IPO next year.
Institutional investors note that despite the pandemic, the outlook for India’s stock market remains positive. On the economic outlook, a second wave of Covid-19 infection in March prompted the International Monetary Fund to lower the country’s GDP growth forecast for 2022 from 12.5% to 9.5%. However, this remains above the IMF’s 4.9% forecast for the global economy.
This week, AsianInvestor asked investment experts to share their views on investor interest in Indian equities, and the factors contributing to this.
The responses have been edited for brevity and clarity.
Sukumar Rajah, Director of Portfolio Management
Franklin Templeton Emerging Markets Equity
In the short term, the relative earnings outlook in India is favourable due to a strong domestic rebound post the second wave of Covid-10. There is lower earnings visibility in China due to ongoing regulation and weakening macro indicators, whereas export-oriented Korea and Taiwan face headwinds from global supply shortages. Asean is extricating itself from the current wave of Covid-19.
Longer-term, we have increased confidence in Indian earnings growth due to positive demographics creating a long runway for consumer penetration and upgrading, continued private sector penetration in segments like finance and healthcare, digitalisation from a low base, and supply-chain diversification supported by government policy. Our interactions with the C-suites of Indian companies indicate confidence in their ability to grow their businesses based on industry consolidation leading to improved profitability, a fresh investment cycle, government initiatives seeding new investments in higher value-add areas, and the trend of global supply chain diversification.
We identify bottom-up opportunities based on our assessment of a company’s growth, quality, and sustainability. Based on this framework, we have increased our allocation to India as the above factors are driving an improvement in the quality, sustainability, and growth characteristics of our Indian holdings.
Huzaifa Husain, head of India equities
PineBridge Investments
What is happening in the neighbourhood lends credence to India and it is not going unnoticed. There are several other powerful reasons why India should benefit. Firstly, India’s macroeconomic vulnerability to a possible rise in global interest rates has been reduced significantly. Next, the primary market is extremely robust with IPOs (initial public offerings) in huge demand, resulting in lowered cost of equity for companies. Many “new age” start-ups with disruptive business models are looking to capitalise on this opportunity. Finally, India’s weight in MSCI Emerging Market Index is not commensurate with the size of its economy. As more IPOs happen, market capitalisation is expected to rise along with its weight in the index. As a word of caution, the higher economic growth might not percolate to all companies equally but will disproportionately benefit the ones that have the organisational acumen and financial strength to take advantage of various disruptive trends. Therefore, company selection will be the key to future investment success.
Rana Gupta, senior portfolio manager, India equity specialist
Manulife Investment Management
We believe there is a case to increase allocations to India. India remains a local and bottom-up story with a stable regulatory environment. This is further supported by a host of structural reforms that should lead to a sustainable long-term growth story led by the core themes of formalisation and digitisation and growing manufacturing in India – this is being supported by government policy. These themes should lead to higher productivity, better quality sustainable growth without running large deficits.
Cyclically, our view on strong economic recovery from Q4CY2021 remains intact, driven by a ramp up in vaccinations as per our expectations and adequate domestic production of vaccines. We believe India is on a strong footing to be one of the few EMs (emerging markets) to have visibility of high vaccination of its population and thus achieve a lasting recovery in the face of Covid-19. We expect that the Central Bank will keep monetary policy accommodative to support the recovery.
Brijesh Ved, head of equities – portfolio management services & offshore advisory
BNP Paribas Asset Management India
The world is currently witnessing a flood of liquidity and returns on US treasury bills are extremely low. The India story is no different. Indian depositors who have witnessed positive real rates for a long time are witnessing a fall in interest rates i.e. bank deposits, RBI (Reserve Bank of India) bonds and even small savings schemes. Foreign institutional investors (FIIs) have poured in over $7 billion in Indian equities and domestic institutional investors (DIIs), backed by stable flows from domestic retail investors, have purchased equities of over $2 billion on CYTD (calendar year to date) basis.
While India’s central bank has played a crucial role in monitoring the financial health of large banks and non-banking lenders, it is India’s high growth possibility, backed by bold union budget presented by the government which focused on growth with temporary slipup on fiscal deficit target on account of Covid-19 impact is leading to significant outperformance of India equity markets with investors discounting prospects of high growth versus the rest of the world in 2022. We expect strong growth in profit after tax (PAT) for Nifty 50 companies to continue in FY (financial year) 2022, with a profit growth expectation of over 30% and FY 2023 of over 15%. Stable to modest increase in bond yields over the current calendar year backed by robust economic recovery will lead to meaningful earnings upgrades over the next few quarters.
Kunjal Gala, emerging markets portfolio manager
Federated Hermes
Indian markets have done extremely well this year – up approximately 25% while China is down approximately 15%. The regulatory review across sectors and the agenda of ‘common prosperity’ has negatively impacted fundamentals and increased the risk premium for Chinese equities. Though headline risk may not subside in China, we are starting to see some very compelling valuations. India’s economy is back around its pre-pandemic levels and the vaccination program is progressing well. The market has also been helped by easy liquidity, high retail participation and excitement generated by the IPO of interesting new economy internet businesses. Near-term valuations for the markets seem high, however India is pursuing structural reforms that improve the long-term growth prospects. A new property cycle has commenced, expected to be followed by a broader capital spending cycle that will be positive for the economy. The Reserve Bank of India has built significant FX (foreign exchange) reserves thus reducing macro vulnerability and it remains firmly pro-growth.
Alexander Treves, head of emerging markets and Asia Pacific equities investment specialist team
JP Morgan Asset Management
While India has always remained on investor radar screens, flows into Indian strategies have been subdued for some years now in comparison with flows to Greater China. The performance of Chinese new economy giants has overshadowed many other assets in the region. In addition, India has been going through its own credit cycle, out of sync with most of the rest of the world, which has acted as a drag on earnings. However the cycle will pick up in time, and while the near term outlook for Indian equities is undoubtedly dependent on the trajectory of the pandemic, the investment case for India remains compelling in the long term. Fortunately the pandemic has not derailed broader optimism on the prospects for normalisation and a sustained recovery in the next few years. This should translate into a strong rebound in earnings growth, which has been weak for the past several years.
India remains an early-stage growth economy with a long runway of growth for the foreseeable future. This is complemented with an investable universe of companies which is large, diverse and ever-growing. There are many well-run businesses that have demonstrated remarkable resilience, not only to survive the extreme environment over the past year, but also demonstrated the potential to eventually emerge stronger, grow profitably and create value for shareholders. For example, we believe that the private sector banks in India will enjoy many years of positive growth, as their addressable market is boosted by higher financial inclusion and further as they gain market share from state banks. Our investment process remains oriented towards such businesses and should benefit from such opportunities in the long term.
Jin Zhang, portfolio manager
Vontobel Asset Management
We are actively looking at individual names in the Indian market. Though the market has performed well and has become more expensive, we feel there still are names that are not fully appreciated by investors. Many companies have a long runway for growth, as the middle-class in the country demands better products and services in a wide range of areas from consumer staples to motor vehicles to home appliances and financial services. What’s more, the high-quality businesses in the country are well suited to provide localised solutions, oftentimes through their own distribution network. We believe these well-acclimated local players can deliver profitable growth for decades to come.
We have been long-term investors in India and have found that rewarding. Even when the country was going through a very difficult time during the Covid wave earlier this year, we kept our overweight to the country. With a volatile emerging market like India, investors should always focus on the long term and take a patient approach. We believe that, instead of trying to allocate in and out of a country, investors should stick to well-established companies and rely on their compounding power over time to safeguard and grow their wealth.