India's stock market has recently made headlines with its robust growth, even amid global economic slowdowns. Data reveals that since its low point in March 2020, the total market value of Indian stocks has approximately doubled, surpassing the $4 trillion mark as of December 6.
Wall Street Journal reports that the Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi, secured victories in three key state elections, contributing to the Sensex's 0.63% rise at Tuesday's close. The index has seen an increase of over 13% this year, potentially marking its eighth consecutive year of growth.
As of Tuesday's close, the Nifty 50 index continued its upward trajectory, reaching a new high of 20,855.1 points with a 0.81% increase, marking three consecutive days of record highs.
The question arises: what fuels the Indian stock market's eight-year rise to become the world's fourth-largest by market value?
In the short term, the BJP's victory in local elections has eliminated a political risk factor for investors and solidified Modi's position ahead of next year's national elections. This has led many to bet on the continuity of government policies.
The Indian stock market closely follows the country's economic growth, truly reflecting the "economic barometer." This year, India's active economy has stood out amidst global economic slowdowns, driving the stock market's rise.
Other factors contributing to the surge include India's robust consumer demand, the growth potential of Indian companies, and the country's resilient economy.
India's economic resilience has been a catalyst for the continuous rise in the stock market. Data released by India shows that its GDP grew by 7.6% year-over-year in the quarter ending in September, exceeding economists' expectations and the central bank's 6.5% forecast.
Economists have revised their growth projections for India, predicting an economic growth rate of 6.7%-7% for the fiscal year ending March 31, 2024. India's GDP is expected to reach around $4 trillion by 2024 and potentially surpass Germany and Japan by 2025 or 2026, becoming the world's third-largest economy after the U.S. and China.
One reason for the rapid economic growth is the continuous increase in India's per capita GDP. In 2022, India's per capita GDP reached $2,388.6, a 27.77-fold increase from $83 in 1960, with an average annual growth of 5.57%. In comparison, the U.S. saw its per capita GDP increase from $3,001 to $76,328 during the same period, a 24.43-fold increase with an average annual growth of 5.36%.
Analysts also attribute India's economic growth to its relatively young population, with a median age of 28 years, supporting economic expansion.
Guosen Securities, in its research report, states that India's young demographic structure is a long-term source of economic and stock market dividends.
Looking at the economic foundation and industrial structure, Guosen Securities believes that India's economic strategy is a crucial foundation for the stock market's upward trend. The service sector strategy, attracting significant foreign direct investment (FDI) through service outsourcing, supports rapid economic development. Although the manufacturing sector is not mature, a large number of high-value service industry companies are sufficient to support the stock market's rise.
Guosheng Securities also notes that high dependence on foreign capital brings high volatility to the Indian stock market. With FDI inflows decreasing in 2021 and 2022, the overall PE of the Indian stock market has been adjusted downward, raising widespread concerns about the sustainability of the market's future growth.
India's stock market benefits from a healthy entry and exit system. Guosen Securities points out that this system forms the basis for the aggregation of quality stocks in the Indian market. Companies face strict regulatory systems post-listing, and those not meeting the criteria are forced to delist. Directors and founders of forcibly delisted companies, along with all companies they have established, are barred from entering the securities market or applying for relisting for ten years.
This "easy entry, strict regulation" system puts "survival of the fittest" pressure on listed companies, with poorly performing companies being promptly eliminated. This inversely drives the selection and cleansing of investment targets from an ESG corporate governance perspective.
Regarding the Indian stock market system, both individual and institutional shareholders face strict regulations on large-scale reductions. Long-term investors can reduce their holdings by no more than 25% in the first year, 15% in the second year, and 10% in the third year, with free reductions allowed only after the fourth year.
For short-term investors holding stocks for less than a year, reductions of up to 50% are allowed in the first year, 35% in the second year, 25% in the third year, and 10% in the fourth year, with free reductions possible only in the fifth year.
Analysts note that the Indian stock market operates on a T+0 trading mechanism for retail investors and T+3 for institutional investors, allowing retail investors to exit before institutions in case of risk.
Guosen Securities points out that the development of derivative trading systems has greatly expanded the capacity of the Indian stock market, stimulating active securities market trading:
Under the promotion of India's two major exchanges, index futures were launched in June 2000, index options in June 2001, stock options in July 2001, and stock futures in November 2001. Derivative trading has greatly enlivened the Indian securities market. As of 2022, the National Stock Exchange of India (NSE) has ranked first in the world for four consecutive years in terms of futures and options trading volume.
Data shows that from January to July 2023, the trading volume of options and futures on India's two major exchanges was 3.5 trillion rupees, over 400 times the spot trading volume (86 trillion rupees).
Strong corporate profitability drives stock price increases Analysts generally believe that India's economy, primarily driven by domestic demand, supports the rise in the stock market, mitigating the impact of global risks. The strong performance of consumer durables in the first and second quarters of 2023 further confirmed Indian companies' profitability, driving the stock market's rise.
Guosen Securities points out that India's low savings rate indicates increased consumption levels, with the strong performance of consumer durables forming an essential foundation for the long-term rise in the stock market.
Data shows that with the recent decline in the savings rate, India's private consumption has gradually increased. The boost in private consumption has significantly stimulated India's durable consumer goods market, growing about sixfold from the 2010-2022 fiscal year:
With consumption boosted, durable goods have become the fastest-growing sector in the Indian stock market. In the Sensex30 and Nifty50 indices, the Indian consumer durables and apparel industry performed exceptionally well in 2023.
In the industry index compiled by the Bombay Stock Exchange, the best-performing industry since 2009 has been the durable goods industry. Therefore, the strong performance of consumer durables is also an essential foundation for the long-term rise in the Indian stock market. To verify the relationship between the Bombay Durable Goods Index and the consumer durables and apparel industry, we used annual market value-weighted stock prices to represent industry trends, finding them consistent with the Bombay Durable Goods Index.
In the consumer durables and apparel industry, individual stocks have also experienced a shift from valuation-driven to profit-driven changes.
Additionally, Guosen Securities believes that high growth remains a key feature of India's large-cap companies, forming an essential basis for driving index growth:
According to the style diffusion effect, large-cap stocks often correspond to value attributes, while small and mid-cap stocks are associated with high growth attributes. In India's current economic development stage, large-cap companies possess high growth attributes, laying the groundwork for broad index growth.
Tanvi Kanchan, director at Indian brokerage Anand Rathi Shares and Stock Brokers, states that this year, mid and small-cap stocks in the Indian stock market have performed well, contributing to the overall economic capital expenditure recovery.
On the other side of India's hot stock market is investors' concern about overvaluation. Analysts point out that although Indian companies' earnings are expected to grow strongly by nearly 20% over the next two years, the MSCI India Index's forward price-to-earnings ratio is currently 20 times, slightly below the historical average of 20.5 times but still higher than the regional average.
Some investors worry that the stock market is overvalued and crowded, increasing the likelihood of a market correction.
What's next for the Indian stock market? Guosen Securities believes that looking ahead, the Indian stock market remains optimistic in the long term but cautious in the short term, with the return of foreign capital overseas potentially putting pressure on the market:
Firstly, in terms of fundamentals, India plays the role of a "catch-up country" in emerging markets, maintaining high growth rates by replicating the urbanization and industrialization experiences of leading countries, providing a long-term basis for stock appreciation driven by earnings.
Secondly, in terms of capital, high dependence on foreign capital brings high volatility to the Indian stock market. In 2021 and 2022, FDI inflows significantly decreased, leading to an overall adjustment in the PE of the Indian stock market. Under the U.S. policy of industrial repatriation, the model of FDI-driven valuation increases in India may be unsustainable. Approximately 38% of Indian stocks are held by foreign investors, with only 3% of Indian households investing in the stock market.
Finally, net inflows from Foreign Institutional Investors (FII) into the Indian stock market are decreasing. Since the COVID-19 pandemic, FII has maintained significant net outflows in 2021 and 2022, with net inflows hovering around zero in the first nine months of 2023, leading to significant index retracements. With U.S. Treasury yields breaking 5%, the return of foreign capital overseas also puts pressure on the Indian stock market.
How can Chinese investors participate in the Indian market? Huatai Securities points out that Chinese investors can invest in the Indian market through QDII funds. As of now, there are two QDII funds in China investing in the Indian market: Industrial Bank of India Market and Manulife India. The former invests in Indian market ETFs in the form of FOF and is an LOF product that can be traded on the secondary market; the latter invests in Indian market stocks:
- In terms of fees, the management fee for the Industrial Bank of India Market's RMB share is 1.6%, and the custody fee is 0.2%; Manulife India's management fee is 1.8%, and the custody fee is 0.3%.
- In terms of purchase and redemption efficiency, both products have a purchase confirmation day and redemption confirmation day of T+2, with redemption payment days of T+10. However, the Industrial Bank of India Market's RMB share is also an LOF product, allowing trading on the secondary market.
- In terms of scale, both products investing in the Indian market saw rapid expansion in scale and shares in the first half of 2023.