Indian equities cement safe haven status and set to extend lead over global peers

After emerging as a safe haven amid this year’s global equities rout, Indian equities look set to extend their lead over global peers and end 2022 on a high.

A return from overseas investors is supporting the market, where the benchmark S&P BSE Sensex index hit a record high on Friday as risky assets cheered on a drop in US inflation. An unprecedented boom in retail investment, strong domestic demand that has enabled one of the fastest growth rates in the world, and political stability are also tailwinds that have helped India decouple from the rest. Emerging Markets.

“Amid the noise of markets around the world today, India is sending the right signals,” said Vikas Pershad, fund manager for Asian equities at M&G Investments (Singapore) Pte. “There is still a lot to love about the opportunity offered in India, whether judged in absolute or relative terms. The likelihood that we will see continued outperformance is high.

Up 6.1% this year, the Sensex is on track for a seventh consecutive annual increase. Its gain is the biggest among benchmarks in countries with stock markets valued at at least $1 trillion, and compares to a 23% loss in the MSCI Emerging Markets Index. The MSCI All-Country World Index is down 18% in 2022.

As local retail money helped cushion the Indian market earlier in the year amid a record foreign exodus triggered by the Federal Reserve’s aggressive rate hikes, stocks have steadily strengthened. since this year’s lows in June, as overseas buyers slowly returned. Strong earnings last quarter also bolstered investor confidence in the economic recovery.

India recently overtook the UK to become the world’s fifth largest economy. Gross domestic product is expected to grow 7.0% in fiscal 2023, according to a recent Bloomberg News survey.

China Diversifier

India has also benefited from China’s relentless fall this year, which has spooked global funds. As they sold off Chinese stocks in October, Indian stocks saw an influx. Overall, foreigners have bought $2.5 billion net of Indian stocks so far this quarter after picking up $6 billion in the previous three months.

“From an asset allocation perspective, we see Indian equities as a diversifier from China’s reopening risks,” said Ray Sharma-Ong, chief investment officer of multi-asset solutions at abrdn plc. . “We believe Indian equities will remain quite resilient in the current environment.

Flow trends – both foreign and local – and investor reaction to further policy tightening from the Reserve Bank of India could be key to the outlook for stocks.

Meanwhile, China’s battered market is seeing a sharp rebound in November as signs emerge that authorities are moving away from the strict Covid Zero policy. The rally continued on Monday, with a surge in property names as the country plots its most sweeping bailout for the sector.

Given that the Covid checks and the real estate crisis have been the main pain points for investors, the measures taken by the authorities could encourage funds to pile up in Chinese assets, which would have an impact on the demand for Indian assets.

“A strengthening oil price also poses a key risk,” said Sat Duhra, Singapore-based fund manager at Janus Henderson Investors. India imports nearly three-quarters of its oil, making it one of Asia’s most vulnerable countries to rising prices. “In the face of rising external risks, it is difficult to see India sustaining this level of valuation premium.”

Structural growth

Still, many long-term market watchers say India’s market performance will be helped by underlying fundamentals such as favorable demographics that are central to its domestically-focused economy.

Government incentives are also encouraging foreign companies, including iPhone makers, to set up factories in India, which boosts local production and attracts foreign investment.

“Given all the problems we are seeing in global markets, India is a safe haven,” said Tushar Pradhan, chief investment officer at HSBC Asset Management India. India’s per capita income is expected to hit a higher trajectory, and “when you hit that kind of range, which happened to China 20 years ago, the next 10 to 20 years is a period of significant growth. revenues”.

Morgan Stanley expects India’s GDP to more than double to over $7.5 trillion by 2031 and its market capitalization to grow by more than 11% annually to $10 trillion. dollars, according to a report released last month.

Local investors poured about $1.1 billion into equity funds in October, marking a 20th consecutive month of net inflows.

“In all the years I have watched the Indian stock market, I have never seen such strong national confidence in the economy, in markets in such challenging global conditions,” said Gary Dugan, chief executive of the Global CIO Office. “Improving market performance hinges on structural change and the government delivering on its broad promises. We expect the good news to keep rolling in.

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