As the MSCI India index gained 9.3% in July – outperforming all other emerging market indices – domestic investors continue to show growing confidence in Indian equities, diversifying their savings into equities and away from the more traditional choices of gold, real estate and fixed income.
July saw a robust rebound across all sectors on receding concerns over sharp interest rate rises as well as solid economic growth momentum (Exhibit 1). Manufacturing output in July rose at the fastest pace for eight months, driven by broad-based sector growth.
Government policy encourages growth
While one strong month is no guarantee of longer-term performance, the broad-based strength underscores the Indian government’s target of growing the economy from the current USD 3 trillion size to USD 5 trillion in the next 5-7 years. That translates into a compound nominal annual growth rate of a sizeable 10%-12%.
The government’s GDP growth plan will draw upon drivers including:
- A surge in manufacturing, production-linked incentive schemes and exports
- An ‘ease of doing business’ strategy facilitating trade, commerce and employment
- Rebooting India’s capital expenditure cycle
- The ‘housing for all’ scheme
- Boosting climate change and renewable green energy initiatives.
Already, we believe the economy is in good shape to withstand global volatility arising from geopolitical and other risks.
Foreign exchange reserves are now close to USD 600 billion. Inflation, although high, is expected to moderate in the second half of the year. Fiscally, tax buoyancy is high as exemplified by July’s INR 1.49 trillion in Goods and Services Tax income, up by 28% YoY on account of better reporting and the economic recovery.
As India pushes for sustainable growth over the next five years, corporate profits are on average expected to double over the same period (see Exhibit 2).
Investors considering Indian equities have a wide range to choose from. The country’s equity markets are valued at USD 3.5 trillion – among the world’s seven largest markets – with more than 100 companies exceeding USD 1 billion in market capitalisation. Small and mid-cap companies represent some 30% of the market, and there are more than 500 start-up and entrepreneurial companies across 25 sectors.
Changing investor profile
One notable trend is the recent rise in domestic investor activity. This has helped to more than offset the slippage in inflows since the pandemic from foreign institutional investors (FIIs).
Until recently, FIIs were considered the backbone of the Indian markets. But we are now seeing a surge in confidence among domestic investors, leading them to diversify their savings and investments away from the traditional first choice options of gold, real estate and fixed income to equities.
This has come on the back of investor awareness campaigns, the improved performance of equity as an asset class, rising income and savings, a growing working population and the government’s digitisation initiatives.
As a result, the number of individual investor accounts holding stocks or mutual funds in an electronic form have been growing steadily.
Equity is not only coming to be seen as a preferred asset class among domestic retail investors, it is also held over a longer timeframe than non-equity assets: 43.6% of equity assets are held for more than 24 months. The number of investor equity accounts has more than doubled from 2020 to today (Source: NSDL, CDSL, JPMorgan estimates).
So, despite FIIs having been net sellers in emerging market equities since the pandemic began, Indian equity markets have held up well with the help of local investors.
Returns in line with profit growth
- Over the last decade, Indian equity returns have been in line with corporate profit growth; profits have grown in line with nominal GDP
- Over the next five years, profits are expected to more than double, outpacing nominal GDP growth
- Equity returns over the medium term should reflect corporate profit growth, assuming stable valuations.
The government’s recent reforms – among them of tax, land and labour – together with the reorientation of its strategy away from austerity and towards growth and fiscal and monetary expansion – are beginning to bear fruit. This should augur well for Indian equities in the coming months and years.