Indian stock markets reached record highs yesterday as the US Federal Reserve’s major rate cut boosted risk appetite and encouraged capital to flow into emerging markets.
The Nifty 50 is up almost 20% since the start of the year and the BSE Sensex has strengthened by over 17%, with both hitting all-time highs in the opening trading sessions of the week.
In June, India’s stock markets took a battering after the shock election results which saw the incumbent prime minister Narendra Modi fail to secure an outright parliamentary majority. Markets feared that Modi would be forced to compromise on his agenda, which was widely seen as business friendly. However, bullish sentiment has increased rapidly since then, with the stock market rising again to hit record highs.
Anubhav Sahu, equity research analyst at Moneycontrol Research in Mumbai, told Disruption Banking that “after the aggressive start to the interest rate normalisation cycle in the US, the Indian rupee should appreciate and fund flows to emerging markets such as India should increase because of interest rate and growth differentials.”
“This is based on our base scenario of a soft landing in the US and expectations for healthy corporate earnings in India in the near future. In anticipation of a rate cut cycle, in September, we have seen foreign institutional investor (FII) flows to the tune of $4 billion, which is 44% of the entire FII net flows this calendar year,” Sahu added. “That said, we believe FII inflows can further accelerate and strengthen liquidity as one of the driving factors for Indian equities.”
Harsh Agarwal, a hedge fund manager based in Mumbai, agrees with this assessment but noted that there is some divergence in the performance of Indian equities depending on the sector.
“The strong domestic inflows and softening yields are supporting Indian equities,” he said. “However, there has been a noticeable difference between equities exposed to the public sector, which are witnessing significant pullback, and consumer-facing stocks, which are benefiting from improving demand momentum. Less cyclical or higher-quality stocks have also gained momentum.”
“Expect continued upward momentum in equity markets for the rest of the year,” Agarwal told Disruption Banking.
Indian markets generally have seen an increased influx of foreign capital as the country continues to open up and become a more attractive destination for investment. Earlier this year, JPMorgan confirmed that India is likely to be included in the bank’s benchmark emerging market debt index, in a move that is widely expected to boost foreign investment inflows further.
This week Modi is in the US for meetings and negotiations on how to increase the amount of US capital being invested in India, with the Indian leader taking a particular interest in engaging with the US tech sector:
Abhinav Mehra, co-manager of the Chikara Indian subcontinent fund in London, told Disruption Banking that “Modi’s visit to the US this week could not have come at a better time for India, with the recent news that the country has displaced China as the largest MSCI emerging market.”
“Its weight in the MSCI AC World IMI index is now 2.4% compared to China at 2.2%. When launching our India strategy in 2018, it was just circa 1% of MSCI’s global benchmark, and it was our belief that because of its less correlated domestically driven growth path, this would increase over time, and we made the case for a structural allocation.”
“According to Morgan Stanley, India’s nominal GDP growth rate is more than three times that of China’s, creating an acute difference in operating and earnings growth backdrop for companies between the two countries,” he added.
Given this, it is likely that Indian equities will continue to perform strongly, particularly given the country’s strong macroeconomic fundamentals.
“In our view, policy reforms, favourable demographics, low debt and higher tax takes have all driven the wider market growth. Surging foreign direct investment and the government’s focus on manufacturing has also contributed greatly,” Mehra noted.
“As the Indian economy continues to grow, at an annual rate of c.7% currently, and with its market cap now over $5.5 trillion (overtaking the UK at c.$3.2 trillion) we believe the need for a dedicated India allocation, especially one benefiting disproportionately from domestic growth, will continue to rise.”
Author: Harry Clynch
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