A decisive change could help lift consumer and business sentiment from near-record lows, rouse the property market from its slumber and boost auto sales.
India's stock market is unchanged in dollar terms compared to a year and a half ago, when its economy restarted after the disastrous boom of the delta version. And yet, its weighting has dropped behind Taiwan and South Korea to second place in the MSCI emerging markets index, with almost all of its gains coming at the expense of the gauge's biggest component: China.
The world's second-largest economy has seen equities fall by two-fifths since June 2021 amid Beijing's isolationist COVID-19 policies, real-estate industry turmoil and punitive antitrust campaigns against the country's valuable tech firms. because of. If China is caught in an excess of pessimism, the opposite is the case with India. Shares have risen modestly despite aggressive monetary tightening by the US Federal Reserve due to a surge in post-pandemic urban demand.
As a result, while China's share in MSCI EM declined from 35% to 28% as of May 2021, India's share increased from 10% to 15%.
Will the reopening of the Chinese economy kill India's performance? This will be a question for global investors in 2023.
If the experiences of other countries are any guide, the move from zero infection toward ripping the virus through communities will be chaotic, and possibly fatal, for China's elderly, only 40% of whom have had booster shots. However, a decisive change could help lift consumer and business sentiment from near-record lows, rouse the property market from its slumber and spur auto sales. That could also prompt analysts to bump up their forecast for 4% earnings growth over the next 12 months. Before the pandemic, those expectations were 17%.
India, the pain of Covid-19 - and the benefits of reopening - are both in the rearview mirror. The economy is now losing momentum, although market volatility continues. The consensus expects earnings to rise 18% over the next 12 months, despite some caution in projections due to high inflation (hurting the margins of local consumer firms) and the global recession (affecting software exporters). Optimism runs highest with the banks. They are benefiting from higher business volumes as well as better pricing: Increased commodity prices have fueled demand for working capital loans, even as rising rates have pushed up interest margins.
The case for some rotation from Indian to Chinese stocks is already getting stronger. BNP Paribas recently downgraded India from "overweight" to "neutral" by removing the country's consumer-staple stocks from its model portfolio and reducing exposure to software exporters. “Our strategic caution on India stems from the sky-high relative valuation of the market and the potential for redistribution of wealth to North Asia with the reopening of China,” says Manishi. Raychaudhuri, Head of Asia Research, BNP. He said the consensus view on India's consumption-oriented stocks is perhaps too optimistic, while the federal government's budget - ahead of the 2024 elections - could introduce additional volatility.
In the long term, India seeks to strengthen its investment appeal by emerging as an alternative to China. President Xi Jinping's policies are increasing rift with the West, with Prime Minister Narendra Modi pitching his country as a destination for multinationals seeking to reduce their overexposure to Chinese supply chains.
There's no guarantee that the gamble backed by $24 billion in subsidies for manufacturers will work. As of 2018, Arvind Subramanian, economic advisor to the Modi administration, and Josh Feldman, a former International Monetary Fund official in New Delhi, wrote in a recent Foreign Affairs article: "India faces three major obstacles in its quest to become 'the next Have to face China;' Investment risk is huge, policy flows are strong, and macroeconomic imbalances are huge.
Other countries may also have a claim. Vietnam, more open to trade than India, is on track to oust Britain from the list of America's seven biggest goods trading partners this year. The Southeast Asian manufacturing powerhouse didn't even feature in the top 15 until 2019. According to Subramanian and Feldman, the vast Indian group supported by the government.
Firms controlled by Gautam Adani, the richest Indian businessman, have jumped 33% since 2021 in the BSE 500, a broad index of the country's biggest companies, in local currency terms. Throw in rival Mukesh Ambani's telecoms-to-petrochemicals empire, and half the profits are spoken by the two wealthiest tycoons.
So far, however, the growing concentration of wealth is working well for local investors – they are neither too skeptical of their country's destiny, nor too critical of its direction. This is because their prosperity is tied to the same pro-capitalist policies. Four years ago, India's biggest firms earned a combined pre-tax income of 7 trillion rupees ($85 billion), of which the exchequer took nearly a third. Now, the profit before tax has increased to Rs 1.3 trillion, but the government's share has come down to about a quarter. The relative importance of indirect taxes, including those on petroleum products, has increased.
No good results for India's poor, who suffer more than the rich from a levy on consumption, especially in an inflationary environment. But to the extent that the taxation burden is light on companies, the absence of meaningful purchasing power beyond a small affluent section in the stock market is unlikely to be questioned. India's wage-based economy has become a profit-driven enterprise, and domestic investors seem to be fine with that. In five years, India's managed investment -- life insurance, mutual funds, retirement accounts, hedge funds and portfolio services -- has grown from 41% to 57% of GDP, according to Crisil, S&P Global Inc. As the hunt for yields reaches more to smaller cities and towns, it may not take long for the $1.6 trillion industry to reach $2 trillion in bank fixed deposits.
Global investors' exit from China this year has been more brutal than the $17 billion they pulled out of India, with net outflows of over $187 billion. As China reopens, they are bound to put more money at work in the People's Republic. Even if some of those funds come at the expense of India, it is important to remember that the rapidly growing pool of local institutional liquidity is reducing the influence of foreign fund managers. As long as India Inc delivers reasonable earnings growth, foreigners will not be able to ignore a country where an increasingly strong domestic investment class has come to worship profit.
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