India’s economy has been on a rapid upward trajectory over the past few years, and according to a growing list of enthusiastic analysts, the future appears bright.

Since the newly re-elected PM Narendra Modi first took up the top post back in May 2014, India’s benchmark indices had grown by a little more than three times in value since Modi got the top job in May 2014.

But it hasn’t been plain sailing for Modi.

Indian voters defied predictions, undermining the ongoing dominion of Modi’s Bharatiya Janata Party (BJP).

Modi’s BJP is set to form government once again, but after securing some 240 seats on its own, it’ll only be via the support of coalition partners in the NDA (National Democratic Alliance).

“Obviously the early results trends are not positive for the markets. But to be sure, as long as the BJP/NDA manages the 272 seats required to form the government, the drop will be only a short-term reaction overall,” says Gaurav Dua, head of capital market strategy at the online broker and trading platform, Sharekhan.

However, Mugunthan Siva of India Avenue believes it’s important to recognise that – regardless of a governing majority or a coalition – the biggest driver of India’s real GDP growth (which has averaged 6.2% over the past 40 years) is the country’s demographics and underlying fundamentals, rather than makeup of the government.

India is now the world’s fifth largest economy, at close to US$3.9 trillion, trailing only the US ($29tn), China ($19tn), Germany ($4.6tn) and Japan ($4.1tn).

And it’s more than likely Delhi will surpass Berlin and Tokyo by the end of the decade, given it will be the world’s fastest growing major economy this decade.

With a burgeoning population, a dynamic and youthful workforce, and advancements in technology, India is poised for further transformative changes that will shape its economic and social landscape, says Anh Lu, VP at T. Rowe Price.

Anh is also the lead portfolio manager for the firm’s Asia ex-Japan Strategy.

She says over the last few years India’s stock market has followed the trajectory of its economy and has been one of Asia’s best performing stock markets.

“We think the country’s prospects are bright. The challenge for us as investment professionals is centred largely around valuations.”

Certainly, with the gains flowing, investors are currently willing to pay a premium for Indian companies – the stock market’s recent run has been led by the vibrant domestic, retail investor market.

“Due to reforms passed a few years ago targeting India’s informal cash economy, we saw assets move into the financial system. In addition, the relatively high levels of inflation over the past couple of years have eroded the real return on cash deposits, and in turn have driven money into the stock market.”

For the first time, Anh notes, the domestic retail investors now own more of the market than foreign investors.

And yet, again according to Mugunthan Siva, MD at India Avenue, investors globally are vastly underrepresented when it comes to exposure to India.

The MSCI ACWI has a weighting of 1.7%, with most investors underweight India in their overall global equity exposure.

Mugunthan says this has been largely driven by:

1) An under exposure to Emerging Markets generally (which have been a failed asset class over the past 15 years).

“Despite India’s significant outperformance of Emerging Markets, most allocators, researchers, and consultants still invest via broader buckets and hence their exposure is tainted by this thought process.”

2) India is seen as “expensive and volatile” in nature as a standalone investment.

3) A tendency of Western media to report only on only “events” rather than the growth and development being achieved.

However, Mugunthan also reckons that for an AUD domiciled investor, there are several reasons why a specific allocation to Indian equities makes sense from a portfolio perspective.


Here’s a few of them:

1) Indian equities low correlation to Australian Equities and Global Equities, relative to Emerging Markets.

“India is a net-commodity importer which is uniquely different to Emerging Markets like South Africa, Brazil, Saudi Arabia as well as Australia. Hence is currency having a low correlation to commodity fuelled currencies like AUD or the EM basket.

“In fact, the INR/USD has about half the volatility of AUD/USD.”

2) India’s Nominal GDP and EPS growth.

“GDP and EPS growth have correlation (unlikely many other Emerging Markets). Nominal GDP growth has averaged 11-12% in India over the century, which is roughly equivalent to 11% EPS growth over the period.”


Modi 3.0

That said, India held its national elections over the last six weeks, with close to 650 million people heading to the polls, over seven phases.

Mugunthan says their view is that the election results “indicate the disparity which has emerged in terms of wealth in India”.

The bottom of the pyramid has endured a challenging existence pre-COVID and this was accentuated post-COVID. Rising unemployment in rural India and rising inflationary impact at the lower wealth segments have been lower on the priority list of the BJP majority driven Government.

The number one priority has been a focus on capex/infrastructure rather than populist measures (more synonymous with coalition governments in the past).

The Nifty 50 has moved upwards by close to 25% over the last 12 months.



The drop of close to 6% ahead of the polls trimmed off some of the expectations of a continued majority and exit-polls, partially unwinding the 3% rally incorporating added perceived risk of a coalition government in comparison to a majority going forward.

“Once the dust settles over the next quarter, this will potentially make an attractive entry/additional investment point,” Siva told Stockhead.


India Ave: What will be most impacted…

• Fiscal consolidation path may take longer given the need for more populist measures. This may divert spending on capex/reform initiatives
• Social, labour, land and agriculture reforms may also get delayed
• Changes in policy on taxation, particularly long-term capital gain tax increases may be put on hold, which is positive for foreign investors
• A shift from capex intensity to rural/populist measures. Capex cycle will take a breather at least from the Government, with a hope that the private sector will add capacity given that utilisation levels have been rising
• Public sector businesses which the Government planned to divest will be off the cards for now. PSU Banks who have re-rated significantly over the last three years will now take a breather
• RBI to continue to maintain monetary tightness (no rate cuts) to deal with inflationary pressures on the ground
• Union Budget to examine taxation with potential negative outcome in certain industries and more generically for equity markets if it relates to long-term CGT.
• However, since the introduction of the GST and increased digitisation/compliance, tax collections have been rising and the number of taxpayers has widened

Via India Ave


Where to shop

Mugunthan says with India’s economy recovering strongly after COVID, the best performing part of the stock market has been in the more cyclical areas, particularly in the small- and mid-cap space.

“This is where retail investor inflows have pushed the valuations of many stocks to record highs.

“As investment professionals, our job is to seek to uncover companies where their future prospects have not been fully appreciated by the stock market. Within the context of India being an expensive market, we find the most attractive opportunities today in blue chips, notably the banks.”

He says these companies “offer durable earnings growth potential and are trading on reasonable valuations, having been somewhat overlooked by the market.”

“Both the India Avenue Equity Fund (IAEF) and India 2030 Fund (I30) are well placed to benefit – our stock selection has not been driven by Government Initiatives, but rather companies that benefit in the value chain of increased government spending and investment capex.

“We hold no exposure to PSU Banks and their rise over the last 3 years has been painful from an alpha perspective. It is likely that the “value-trade” has been played, with a switch now back to India’s Private Banks, which offer higher ROE and are well placed relative to their long-term valuations.

“Whilst we have increased our exposure to some Government owned businesses in the last 12 months, we are significantly underweight the Index weighting due to our general view that there are better allocators of capital available in the marketplace.

“We hold no exposure to Adani Group stocks, which have benefitted from the Government’s focus on infrastructure projects and implementation. These stocks may take a breather.

“We are overweight in both Pharmaceuticals and Information Technology and as major export industries for India, with potential significant supply of jobs and rising market share globally, these industries are poised to deliver good results.”

“We have exposure to companies which should benefit from a rural “rising” i.e. Hero MotoCorp (2-wheelers) Kaveri Seeds, Coromandel (fertilisers), Bajaj Finance et al.”