With China’s economy in the doldrums and the Shanghai Composite ($CHSC) falling to a 5-year low, many global investors are pulling their money out of China and investing in India. India’s stock benchmarks are trading at record highs, and they posted their eighth straight year of gains in 2023 as investors bet on the country’s booming economic growth prospects and see it as an alternative to China’s struggling market.
Goldman Sachs and Morgan Stanley have endorsed India as the prime investment destination for the next decade. According to Goldman Sachs, global investors bought $21 billion of stocks in India on a net basis in 2023. India, the world’s fastest-growing major economy, has expanded infrastructure under Prime Minister Modi as he tries to lure global capital and supply lines away from China. M&G Investments said, ”There’s a genuine long-term growth story here, and people are also interested in India because it’s not China.”
Recent history shows that India’s economic growth and the value of its stock market are closely linked. If India’s economy continues to expand at 7%, the market size can be expected to grow on average by at least that rate. Over the past 20 years, India's gross domestic product and market capitalization rose in tandem from $500 billion to $3.5 trillion. In mid-January, India briefly overtook Hong Kong to become the world’s fourth-largest equity market. Morgan Stanley predicts India’s stock market will become the world’s third-largest by 2030. India’s weight in the MSCI Inc.’s benchmark for developing-market equities is at an all-time high of 18%, while China’s share has shrunk to its lowest on record at 24.8%.
Capital flows show the divergence from China to India. In the U.S. exchange-traded fund market, the main fund buying Indian stocks received record inflows in Q4 of 2023, while the four largest China funds combined saw outflows of almost $800 million. According to EPFR data, active bond funds have put 50 cents to work in India for every dollar they pulled from China since 2022. Many global fund managers point to India’s strong growth and relative political stability as reasons to remain optimistic about consistent pockets of growth, even if the broader market still has frothy valuations.
There are concerns that India’s equity market is priced to perfection and is among the most expensive in the world. The S&P BSE Sensex Index ($SENS) has almost tripled from its March 2020 low, while earnings have only about doubled. The index trades as more than 20 times future earnings, 27% more expensive than its average between 2010 and 2020. However, some analysts believe that with a still-low per capita income, India is setting the stage for multi-year expansion and new market opportunities. BNY Mellon Investment Management said, “Despite all this, if you believe India's economy is poised to grow to about $8 trillion or more by this time in the next decade, the volatility is worth it.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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