Indian equities hit record high as investors look beyond China

India’s stock market reached an all-time high this month as robust economic growth, financial reforms and a pro-business government have drawn greater interest from global fund managers.

The Nifty 50 is up 7 per cent this year, compared with MSCI’s broad index tracking emerging market stocks in local currency, which is down 16 per cent. The equity benchmark’s new peak at the start of this month comes as multinational companies increasingly turn to India as an alternative to China for international expansion and to gain access to a fast expanding group of middle-income consumers.

Supply chain disruptions in China due to Beijing’s strict zero-Covid policy have boosted India’s appeal to global businesses. Apple, for example, warned last month that shipments of its new iPhone 14 would be lower than anticipated as China’s Covid restrictions interrupted its primary assembly facility in Zhengzhou. The company is expected to shift 5 per cent of its iPhone 14 production to India this year and a quarter of all iPhones could be made in India as early as 2025, according to JPMorgan.

The shift away from China is happening across a range of sectors.

“Companies involved in electronics assembly, textiles, engineering, chemicals and pharmaceuticals sectors are moving some of their production from China to India,” said Zafar Ahmadullah, who runs a concentrated India strategy with around 20 holdings at Theleme Partners, a London-based private investment partnership.

India is currently on track to become the world’s third-largest economy by the end of the decade. Real GDP is forecast to increase by an average of 6 per cent a year, faster than any other major economy, according to the consultancy Capital Economics.

Meanwhile, the rapid adoption of smartphones in India alongside a government-backed digital payments network are accelerating the country’s shift towards a cashless society, a trend that was accelerated by the pandemic.

The number of smartphone users in India will reach 732mn this year, more than double the 300mn registered in 2017, according to Newzoo, the data provider. Active internet users are expected to rise from 692mn in 2021 to 900mn by 2025, according to the Internet and Mobile Association of India.

“The impact of smartphones on people’s lives is profound,” said Kevin Carter, a specialist emerging market investor, who has designed an India internet and ecommerce ETF, known as INQQ, to tap into the country’s technology ecosystem.

The number of individual users of the government-backed Unified Payments Interface is expected to triple in five years to 750mn, while merchant users could double to 100mn, according to India’s central bank.

At the same time, Indian businesses such as the information technology groups Infosys and Tata Consultancy Services have developed into significant global players, encouraging other domestic companies into overseas markets.

Bajaj Auto, a Pune-based manufacturer of motorbikes and three wheelers, is developing new electric scooters and expanding into Indonesia and Africa. And in healthcare, Glen Finegan, lead portfolio manager at Skerryvore Asset Management, said increasing demand for products and services among India’s growing middle class will help Cipla and Syngene to develop into global pharmaceutical companies.

“There is plenty of interesting innovation across India’s pharmaceutical industry where there is a huge pool of researchers working, but it is essential to find trustworthy partners,” said Finegan.

Trading on a 12-month forward price-earnings multiple of 21 times, India ranks as the second most highly valued equity market worldwide behind New Zealand, according to Société Générale. The French bank expects India’s stock market to deliver earnings per share growth of 13.2 per cent this year, rising to 19.6 per cent in 2023.

High company valuations have prompted some position trimming, however, with net withdrawals by foreign institutional investors climbing to $17.9bn so far this year, compared with the inflows of $3.8bn registered over the whole of 2021, according to data from CLSA, the brokerage.

“India benefited from the move away from China following Beijing’s crackdown on the tech sector in 2020. But the rotation into India is running out of steam and instead emerging market funds are raising their allocations to Brazil, Saudi Arabia and some Asean nations,” said Steven Holden, chief executive of Copley Fund Research, a data provider.

Returns this year for international investors have been dented by weakness in the rupee against the dollar, with the MSCI India index down 2.6 per cent in US currency terms.

Line chart of MSCI indices in $ terms (rebased) showing India’s stock market outpaces China and rival emerging markets

India’s stock market “looks expensive”, said Robert Buckland, global equity strategist at Citigroup, but this is justified by robust earnings growth.

“India’s high valuation is enough to keep many investors cautious, but lndian companies are very good at turning [economic activity] into earnings,” said Buckland.

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