Asia’s sleeping giant India ‘especially appealing’ as reforms drive growth resurgence

WITH the Narendra Modi administration looking on track for a third term as India’s general elections concluded on Jun 1 (Saturday), market observers say the country is stepping out of China’s shadow and looking “especially appealing” to investors.

Based on exit polls, Modi’s Bharatiya Janata Party-led alliance is reportedly on track to clinch between 350 and 400 seats in the 543-seat lower house of parliament. In 2019, the alliance won 352 seats. This could bolster confidence that India’s reform-led growth will continue to set it apart from other major emerging markets.

While China has been grappling with an economic slowdown, India chalked up growth of 8 per cent in the last quarter of 2023. The South Asian nation’s equity market has also been outperforming its emerging market peers, with the MSCI India index returning 21 per cent last year.

The country is now expected to go from the fifth-largest economy in the world to the third-largest by 2027 on the back of reforms.

Market observers said that investors can find opportunities in domestically-driven sectors such as manufacturing, as well as private equity. However, they warn that India’s equity market may be overvalued, and suggest investors adopt a sector-based approach when investing in the country.

An awakening giant

Despite being touted as the “next big thing”, India has seen past economic rallies – such as the one in the mid-2000s – fizzle out.

However, Sanjeev Dasgupta, the chief executive officer of CapitaLand Investment India (CLI), said that fundamental changes in India ensure that its economic growth “cannot go back”.

These include the ongoing creation of high quality infrastructure, the creation of a digital economy as well as a stable, economic policy framework by the current government that is likely to continue post-election, he said.

Meanwhile, demographic changes are boosting India’s growth.

As its middle class expands, the rising purchasing power of Indians will drive consumption in the country, said Yeo Hui Shi, the assistant manager of the research and portfolio management team at FSMOne.com.

India’s limited exposure to China has also benefited the South Asian country in drawing investors.

Derrick Tan, the chairman of wealth management company Wrise Group, said the performance of many emerging markets are tied to China’s economic cycle but India is among the least correlated.

Allocating funds to India allows investors to sidestep China’s economic volatility, he added.

Areas to watch

FSMOne’s Yeo suggested that investors look out for sectors in India with long-term growth potential, such as industrials.

This sector is boosted by secular trends such as the shifting of global supply chains and favourable demographic growth in India.

The Indian government has also provided incentives to support local manufacturing, aiming to enhance the country’s competitiveness against other emerging markets like Vietnam and Thailand, added Yeo.

Similarly, Tan of Wrise sees opportunities in domestic-oriented sectors such as fast-moving consumer goods, infrastructure, and telecommunications, as well as in defensive sectors such as information technology and pharmaceuticals.

These sectors offer stability in the medium to long term due to their stable margin projections, lower input costs and potential gains from a stronger dollar, said Tan.

Private equity has also grown significantly in India, driven by the entry of the world’s biggest private equity investors such as Blackstone and Brookfield, said Dasgupta. These investors have been able to exit from their ventures profitably by selling to other private equity players as well as through trade sales and initial public offerings.

A lot of capital has also flowed into property developments over the past decade, especially business parks that provide office space to technology companies.

“With so much capital flowing in, the developers have been able to monetise their assets at better valuations,” said Dasgupta, adding that yields for the property sector have come down in the last decade.

Market concerns

Despite the optimism over India’s growth, some market observers fear the Indian market might be overvalued.

Tan of Wrise noted that India’s market may be “marginally overvalued” as its valuations have contracted year-to-date from one-year forward price-to-earnings ratio of 23 times to 20 times.

Yeo of FSMOne said that strong earnings growth may explain some of the valuation premium to historical averages and other equity markets. Nevertheless, Yeo said the widening premium was “concerning”.

“Rich valuations pose a risk of disappointment if earnings fall short of expectations, leading to potential downside for equity prices,” said Yeo, adding that on a relative basis, other markets like Japan are more attractive.

Tan, on the other hand, suggested that investors focus on individual stocks and essential industries in light of broad overvaluation concerns.

However, Dasgupta said India is still not the most expensive market globally, and investors with a three to five year horizon stand to benefit from the country’s continued growth.

Entering the Indian market

Reforms over the last decade have made it easier for foreign investors to enter the Indian market, said observers.

Dasgupta pointed out that corporate tax rates for domestic companies have been reduced while foreign direct investment no longer requires any approval from the government.

Tan said that investors can consider investing in India through the country’s two major stock exchanges – the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Foreign investors can participate in Indian equities through the Foreign Portfolio Investment (FPI) route, which includes investments via registered foreign institutional investors (FIIs) or foreign portfolio investors (FPIs).

While there are no restrictions for investing in Indian companies through this route, an FPI cannot hold more than 10 per cent in a listed company.

Tan said that investors interested in the Indian market should stay informed about the regulatory changes and consult with financial advisors or legal experts for guidance on investment strategies.