Compared to a year and a half ago, when its economy was just reopening after the devastating outbreak of the delta, India’s stock market is unchanged in dollar terms. And yet, its weight in the MSCI Emerging Markets Index has overtaken Taiwan and South Korea to take second place, almost all of the gains coming at the expense of the big gauge: China.
The world’s second-largest economy has seen equities fall by 2-fifths since June 2021, due to Beijing’s isolationist policies against Covid-19, turmoil in the real estate industry and an antitrust crackdown against the country’s prized technology firms. If China is in a pessimistic state, the opposite will happen with India. Thanks to pent-up urban demand after the pandemic, stocks have held up well despite the US Federal Reserve tightening monetary policy.
As a result, while China’s share of MSCI EM has increased to 28%, from 35% in May 2021, India has increased to 15%, from 10%.
Will the reopening of China’s economy undo India’s performance? That will be the question for global investors in 2023.
If the experience of other countries is any guide, the pivot away from zero infection to letting the virus tear through society will be chaotic, and perhaps kill only 40% of China’s elderly population who have a booster shot. However, a positive change can help pull consumer and business sentiment away from record lows, shake the property market from its slumber and accelerate sales momentum. This may prompt analysts to raise their forecast of 4% earnings growth over the next 12 months. Before the pandemic, that expectation was at 17%.
In India, the pain of Covid-19 – and the benefits of reopening – are both in the rearview mirror. The economy is now slowing down, although the market continues to bubble. Even with some caution baked into the forecast due to higher inflation (hurting margins for domestic consumer firms) and a global slowdown (affecting computer exporters), the consensus expectation is for earnings to rise 18% over the next 12 months. Optimism is the highest for banks. They benefited from higher business volumes and higher prices: Increased commodity prices increased the demand for mortgage loans as inflation drove up interest rates.
The case for circulation from India to Chinese stocks is getting stronger. BNP Paribas recently downgraded India to “neutral” from “overweight” by removing the country’s consumer stocks from its portfolio and trimming exposure to software vendors. “Our strategic caution on India comes from higher market valuations and the possibility of a fund allocation in North Asia with the reopening of China,” said Manishi Raychaudhuri, BNP’s head of Asia research. The consensus view on India’s consumption-oriented stocks is perhaps too optimistic, while the federal government’s budget – the last before the 2024 elections – could introduce additional volatility, he added.
In the long term, India wants to strengthen its investment appeal by emerging as an alternative to China. With President Xi Jinping’s policies widening the gap with the West, Prime Minister Narendra Modi is positioning his country as an international destination to reduce their excessive exposure to Chinese supply chains.
There is no guarantee that gambling, backed by $24 billion in subsidies to producers, will work. As Arvind Subramanian, an economic adviser to the Modi administration until 2018, and Josh Felman, a former official of the International Monetary Fund in New Delhi, noted in a recent article in Foreign Affairs: “India faces three obstacles in its quest to become the ‘next . in China;’ investment risks are too great, domestic policy is too strong, and economic inequality is too great.”
Other countries may also have a claim. Vietnam, which is more open to trade than India, is on track to unseat Britain in this year’s list of America’s seven biggest trading partners. The manufacturing powerhouse of Southeast Asia did not feature in the top 15 until 2019. Besides, no matter how inviting New Delhi’s policies are on paper, it is not at all certain that they will be implemented indiscriminately and undiluted to the benefit of the national champions – “India’s largest gatherings that the government loves,” according to Subramanian and Felman.
Just firms controlled by Gautam Adani, India’s richest man, took a third of the 33% jump, in local currency terms, from 2021 on the BSE 500, a broad index of the country’s largest companies. Throw in Mukesh Ambani’s rival telecoms-to-petrochemicals empire, and half the profits are claimed by the two richest tycoons.
So far, however, the increase in wealth accumulation seems to have worked well for domestic investors – who have a lot of faith in their country’s future, and are not very critical of it. That’s because their success is tied to the same level of pro-capitalist policies. Four years ago, India’s largest firms earned a combined pre-tax profit of Rs 7 trillion ($85 billion), of which the exchequer took almost a third. Now, the pre-tax profit has increased to 13 billion dollars, but the government’s share has decreased to a quarter. The importance associated with indirect taxes – including petroleum products – has grown.
It’s not a good outcome for India’s poor, who are hurt more than the rich by excise taxes, especially in the context of inflation. But to the extent that the tax burden is lightened on corporations, the stock market cannot doubt the lack of meaningful purchasing power beyond a small class of the wealthy. India’s income-led economy has become a profit-driven business, and local investors seem to be good at it. In five years, India’s managed investments – life insurance, mutual funds, pension accounts, hedge funds and portfolio services – have grown to 57% of gross domestic product from 41%, according to Crisil , an affiliate of S&P Global Inc. Like hunting. because the harvest is more accessible to small cities and towns, the $1.6 billion industry will not take long to get $2 trillion in fixed bank deposits.
With net outflows of $187 billion, the outflow of global investors from China this year has been more aggressive than the $17 billion they have withdrawn from India. As China reopens, they will have to put more money to work in the People’s Republic. Even if some of that funding comes at India’s expense, it is important to remember that the rapid inflation of liquidity in local institutions is eroding the influence of overseas fund managers. Since India Inc. provides decent income growth, foreigners cannot afford to ignore a country where a growing domestic investment class has come to worship income.