India Outperforms, But Can the Rally Last?

With
the
exception
of
the
first
three
months
of
2023,
net
inflows
for
India
equity
funds
have
been
consistently
positive
since
the
third
quarter
of
2022.
But
what
should
investors
expect
from
the
general
election
that
will
bring
more
than
900
million
citizens
to
the
polls?

Modi
is
Favoured
for
Election
Victory

“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.
“Should
Modi
be
re-elected,
there
is
likely
to
be
a
turning
point
in
India’s
growth
story.”

On
the
likely
re-election
of
Modi
and
the
Bharatiya
Janata
Party
(BJP),
other
managers
and
observers
also
have
little
doubt.
Chetan
Sehgal,
portfolio
manager
of
the
Templeton
Emerging
Markets
Investment
Trust
(TEM),
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,
pointing
out
that
this
would
be
one
of
India’s
longest
periods
of
political
stability
since
independence.

The
country
overtook
China
in
terms
of
economic
expansion
in
2023
and
it
is
expected
that
the
gap
could
widen.
In
its
April
World
Economic
Outlook,
the
International
Monetary
Fund
estimated
real
gross
domestic
[roduct
(GDP)
growth
of
6.8%
in
2024-25,
while
China
is
expected
to
grow
by
4.6%
this
year.
In
2023,
the
IMF
estimated
an
increase
in
India’s
GDP
of
7.8%
compared
to
+5.2%
for
China.

In
addition,
the
government’s
monetary
policy,
supported
by
the
Reserve
Bank
of
India,
has
helped
keep
inflation
under
control
(+4.6%
is
the
IMF
forecast
for
this
year)
and
the
social
and
welfare
reforms
promoted
by
Modi
have
fostered
economic
development.

Is
the
Indian
Stock
Market
Overvalued?

If
the
economic
data
does
not
cause
any
particular
concern,
the
rally
in
the
Mumbai
Stock
Exchange
(+36.9%
in
euro
terms
the

Morningstar
India
index
in
the
last
year
to
May
7,
2024)
has
already
generated
some
fears
that
stocks
are
now
overvalued.

However,
Gogate
argues
that
a
Modi
victory
would
set
the
stage
for
an
acceleration
of
the
economy
and
keep
India
attractive
from
a
long-term
perspective
for
two
reasons:

1)
The
internationalisation
of
financial
markets:
the
inclusion
of
Indian
government
bonds
in
the
JP
Morgan
GBI-EM
emerging
markets
index
in
June
2024
and
Indian
bonds
in
the
Bloomberg
EM
local
currency
index
in
September
could
bring
up
to
$40
billion
(£32
billion)
in
foreign
investment,
according
to
Carmignac.

2)
A
financial
system
that
favours
entrepreneurship.
“In
this
phase
of
rapid
expansion,
investors
can
identify
interesting
and
innovative
companies
in
many
sectors,
including
financial
services,
high-end
manufacturing,
specific
consumer
segments
and
real
estate,”
says
Gogate,
but
urges
caution
about
the
valuations
of
individual
stocks.

What
are
the
Risks
for
Investors
in
the
Indian
Market?

In
the
short
term,
Modi’s
victory
is
already
a
foregone
conclusion
in
market
expectations.
The
elections,
therefore,
should
not
cause
major
price
swings
unless
there
is
a
worse-than-expected
surprise
result
for
the
BJP
party.
On
the
other
hand,
his
confirmation
would
immediately
put
him
in
front
of
the
need
to
deliver
on
his
promises,
first
and
foremost
to
grow
GDP
to
$5
trillion
by
2027
from
the
current
$3.7
billion
and
to
attract
foreign
investment
under
the
‘Make
in
India’
programme.

“Key
themes
in
the
BJP’s
manifesto
include
extending
access
to
welfare,
job
creation
and
further
investment
in
infrastructure,
such
as
plans
to
extend
the
reach
of
high-speed
trains,”
Bestinvest’s
Hollands
explains.

Also
in
the
short
term,
however,
investors
should
be
aware
that
other
factors
could
influence
the
financial
market.
As
a
net
importer
of
oil,
for
instance,
it
could
be
affected
by
inflationary
pressures
related
to
rising
crude
oil
prices.
Moreover,
to
continue
growing,
Modi
will
have
to
boost
exports.
In
this
direction,
negotiations
are
ongoing
with
both
the
EU
and
the
UK.

Apple
and
Tesla
Set
Course
for
India

India
also
faces
the
challenge
and
opportunity
of
being
one
of
the
main
beneficiaries
of
many
companies’
reduction
of
dependence
on
supplies
from
China.
Apple
(AAPL),
for
instance,
is
reportedly
close
to
an
agreement
with
two
Indian
companies
(Titan
and
Murgrappa)
to
assemble
camera
components
for
the
iPhone.
“Apple
has
already
significantly
shifted
production
to
India,
where
it
produced
14%
of
its
iPhones
last
year,”
says
Hollands.
“Another
company
believed
to
be
targeting
expansion
into
India
is
Tesla,
which
is
expected
to
announce
major
investment
plans
following
the
Indian
government’s
cuts
to
import
tariffs
on
electric
vehicles
last
month.”

Reasons
for
Caution
on
India
Stocks

In
2023,
the
Indian
stock
market
decisively
outperformed
emerging
stock
markets,
rising
20.8%
in
euro
terms,
compared
to
+7.7%
for
the

Morningstar
Emerging
Markets
index.
It
is
also
in
an
advantageous
position
in
the
year
to
date
(+10.4%
vs
+7.3%
as
of
May
6,
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
solid
growth
prospects
are
reflected
in
the
valuations
of
many
stocks,
which
trade
at
a
higher
price
than
other
emerging
markets,”
says
Franklin
Templeton’s
Sehgal.

“We
remain
selective
in
the
companies
we
invest
in
and
favour
those
that
have
sustainable
earnings
power
and
whose
share
prices
are
at
a
discount
to
our
estimate
of
their
intrinsic
value.”

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