Favourable demographics
India has a large, youthful, and well-educated population which could accelerate economic growth, providing their skills can be harnessed. One of the country’s key advantages is its pool of millions of skilled IT professionals, many of whom are now returning after seeking opportunities abroad. This is fuelled by the availability of capital to invest in innovative ideas, driving disruption and growth across the Indian economy, especially in e-commerce and fintech.
More broadly, as the world faces a shortage of workers, India stands out with its abundant labour force. With global manufacturing moving away from China, India is well-positioned to seize this opportunity. Unlike in the past, India is actively pursuing this chance through its government’s Production Linked Incentive (PLI) schemes, which aim to boost investment in various manufacturing sectors. The government is backing these schemes with a substantial investment of Rs 1.97 trillion (about US$24 billion), offering incentives based on incremental domestic sales to attract and stimulate growth in the manufacturing industry.
Equity market performance
The dynamics listed above are evident in India’s stock exchanges. In recent years, the Securities and Exchange Board of India (SEBI) relaxed foreign ownership limits, which increased the attractiveness of the Indian market to international investors. As a result, the combined market capitalisation of companies listed on the National Stock Exchange and Bombay Stock Exchange has grown by US$1 trillion in under three years, solidifying India’s position in the MSCI Emerging Markets Index.
Earlier this year, India’s weight in the index reached its highest point ever. Together with China, both countries represent nearly half of the EM index universe. Globally, India is now the fourth largest equity market by market capitalisation behind the US, China and Japan. Three Indian companies – Reliance Industries, ICICI Bank and Infosys – are now among the top 10 constituents in the EM index.
The dynamism extends to a surge in initial public offerings. In 2023, India saw 241 IPOs, the highest number in over 20 years. The momentum continues in 2024, with 57 IPOs launched since March, raising almost US$178 billion2.
However, this growth is not without risks. While India’s inflation is stable, and the economy continues to expand, we believe the likelihood of increased volatility is higher than it was six to 12 months ago. The new coalition government is also mindful of the market’s rapid growth: tax changes unveiled in the July budget, including a higher levy on equity investments, aims to limit overexuberance, while lowering taxes for foreign companies to attract more investment.
Additionally, the government has allocated billions of dollars for job creation in a budget designed to solidify the coalition and regain voter support. The new political landscape suggests that implementing reforms in the markets for land, labour, and capital may face some obstacles. We will be monitoring this closely.
Selectivity is key
Given the recent out-performance of the Indian stock market and elevated valuations, bottom-up security selection is crucial. Identifying investments that can capitalise on growth will be key.
India’s market is both large and highly liquid, with over 850 stocks trading at an average daily value of more than US$1 million. It is also notable for its diversity and low concentration compared to other emerging markets.
Active management and, specifically, bottom-up fundamental research have potential to generate alpha in emerging markets like India. It allows investors to build an in-depth understanding of each company’s potential, business fundamentals, governance structures, supply chains and sustainability credentials.
In summary
India’s market reforms position it as a compelling investment destination, offering investors a distinctive proposition within an increasingly diversified emerging market opportunity set.
While the country’s outlook is promising, it is not without risks and therefore requires active navigation as an investor. Success will likely hinge on identifying companies poised to benefit from structural trends. The mix of opportunities and challenges underscores the importance of selectivity, making India an attractive but nuanced investment destination for years to come.
1 Source: tradingeconomics.com/India/gdp-per-capita.
2 Source: www.msci.com. MSCI country spotlight as of May 2024.