India’s Ascension To The League Of Stock Market Superpowers; Are We Currently In The Midst Of A Bubble Or Simply Riding A Bullish Market?

India has ascended to the level of stock market supremacy, attracting heightened attention from global investors.

Individuals and institutions, particularly family offices in Europe and significant investors in the United States, are displaying a newfound interest in Indian investments, a departure from their previous indifference.

The surge in interest is marked by a notable shift in investor inquiries, reflecting a more earnest consideration of India’s investment potential. 

The growing interest coincides with a remarkable upswing in India’s stock market performance, reaching unprecedented levels. 

In late November, the collective market value of companies listed on India’s exchanges surpassed $4 trillion, as reported by Refinitiv.

Indian Bourses On A High

India boasts two prominent exchanges—the National Stock Exchange of India (NSE) and the BSE, the latter being Asia’s oldest bourse, formerly known as the Bombay Stock Exchange. 

Notably, the scorching rally in the market has propelled the NSE, with a higher daily transaction value than the BSE, to surpass Hong Kong, securing its position as the seventh-largest bourse, according to data from the World Federation of Exchanges.

The surge in India’s stock market value places it in the ranks just below the United States, China, and Japan, according to data from Refinitiv.

India’s Sweetening Deal

Investors are expressing increasing enthusiasm for India, with queries centering on its potential to deliver returns comparable to China’s impressive performance in the early 2000s.

Notably, this marks a shift from previous instances of bullishness from short-term investors, as now, long-term investors with strategic and financial perspectives are taking a ten-year view rather than a mere one-year outlook.

India’s benchmark indices, the Sensex and Nifty 50, have demonstrated substantial growth, with the former climbing over 16% and the latter surging over 17% this year. 

Likewise, India is experiencing a surge in Initial Public Offerings (IPOs), witnessing 150 listings in the first nine months of 2023, a notable contrast to Hong Kong’s 42 listings during the same period.

According to analysts, the impressive performance of India’s stocks reflects the strength and potential of the world’s fastest-growing major economy. 

The International Monetary Fund projects a 6.3% growth for India in the current year, while some economists anticipate a closer figure of 7%. 

In contrast, China is grappling with investor concerns over weak consumer demand and a prolonged real estate crisis, leading to significant market declines.

India’s positive economic sentiment stands in stark contrast to China’s challenges, and the divergent growth trajectories between India and China are crucial in the competition for emerging market investments, noted Stephen Innes, managing partner at SPI Asset Management. 

India appears resilient, with its economy demonstrating minimal linkage to China’s end demand and exhibiting low price sensitivity to China’s slowing growth in the region, as highlighted in a report by Goldman Sachs.

Analysts argue that India’s less exposure to global economic risks, coupled with robust domestic flows, will support the market and mitigate large downside risks. 

In a December note, Nomura emphasized India’s limited exposure to a global trade slowdown, positioning it as a potential counter-weight to North Asia in the event of a Western slowdown and continued disappointments in China’s recovery.

India’s appeal extends to global companies diversifying their supply chains away from China. Notably, Apple has expanded its production significantly in India, addressing supply chain challenges experienced in mainland China. 

The country’s attractiveness as a medium-term business destination is emphasized by a survey from the Japan Bank for International Cooperation, ranking India as the most promising destination for Japanese manufacturers, surpassing China due to its economic slowdown and escalating tensions between Washington and Beijing.

The Caution On Upcoming Elections

Despite India’s recent economic successes, foreign investors may exercise caution in the first half of 2024 as the country approaches a general election scheduled for April and May. 

Goldman Sachs anticipates potential weakness in foreign flows due to election-related uncertainties and challenges in the global macro environment during the next 3-6 months. 

However, optimism prevails, with expectations that foreign investment will rebound once the election-related uncertainties subside, particularly if Prime Minister Narendra Modi’s ruling Bharatiya Janata Party secures victory, ensuring political stability.

Bubble Or A Bull Run

Although there is a strong likelihood of Prime Minister Modi’s party winning, not all economists share an optimistic view of India’s future. 

Some anticipate an economic slowdown, citing concerns about the sustainability of private consumption, which has been robust but, in part, driven by debt. 

Alexandra Hermann of Oxford Economics warns that the strong spending this year could pose challenges for consumers in the coming year, especially given distress in the labor market.

Moreover, critics argue that the current buoyancy in the stock market may not accurately reflect the broader health of India’s economy. 

While large firms show increased profitability and are reflected in stock market performance, the situation is less favourable for small and informal firms that do not have representation on the stock market. 

This discrepancy paints a potentially misleading picture of the overall economy. 

Former central bank governor Raghuram Rajan and economist Rohit Lamba, in their recently released book “Breaking the Mould,” spotlight the shrinking of high-employment sectors with many small firms, such as apparel and leather, in the past few years, emphasizing the need for a more inclusive growth path.

As the broader markets continue to reach new highs, investors are grappling with the question of whether the current trend signifies a bubble or is simply part of a bullish market. 

While the answer may only become clear in hindsight, several indicators suggest that the market might not be in a bubble at this point.

The debate between a bubble and a bull market centers around various key data points, with global influences being a significant factor. 

However, examining the last four market peaks reveals a common thread—they were all driven by substantial global events. This phenomenon can be attributed to factors such as the historical dominance of Foreign Portfolio Investment (FPI) flows (though less dominant today) and the presence of twin deficits.

The current market conditions seem to lean towards a balanced or potentially bullish market rather than a bubble; here’s a breakdown of key factors supporting this perspective-

1. Valuations – Market valuations, when compared to the US market, other emerging markets (EMs), and its own historical performance, do not indicate excessive premium or overvaluation. 

In fact, the market is currently trading at a discount to its historical averages.

2. Momentum – While retail participation in the market has increased, especially post the COVID-19 pandemic, the current level of retail involvement is not significantly higher than the average; thus, it suggests a relatively stable market environment.

3. Fear: The shift from equity to liquid funds, often viewed as a sign of fear in the market, is not as pronounced as in previous market peaks, hence indicating that investors may not be panicking or hastily exiting equity positions.

The Last Bit, Considering these factors, it appears that the market does not exhibit the typical characteristics associated with a bubble, according to DAM Capital and instead, it seems to be in a phase of reasonable valuation, characterized by steady retail participation and relatively low fear levels.