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India’s equity market resilient despite Covid headwinds

India’s equity market continues to present an attractive long-term investment opportunity, on the back of the resilience of the growing Indian economy. The country’s economy is witnessing a sustained pick-up post the easing of lockdown restrictions, improved vaccination pace and festive season, supporting the output data in the last quarter.

Largely in line with analyst expectations, India’s Gross Domestic Product (GDP) has grown by 8.4% in the second quarter of the fiscal year 2022 (July-September). In the last policy meeting, the Reserve Bank of India (RBI) had maintained its GDP growth forecast for FY22 at 9.5%.

Going forward, analysts expect a continuation of gradual recovery over the next year, keeping Omicron coronavirus variant related risks in mind. Recently, multiple rating agencies have revised upwards India’s GDP estimates for FY22 in the range of 9-10.5%.

According to Radhika Rao, an economist at DBS Bank, reopening gains is being complemented by festive demand in the second half of this year and will provide a broad-based improvement in activity. “We maintain our full-year growth forecast at 9.5%, with minor tweaks to the third and fourth quarter of the current fiscal year projections.”

Further supporting the economy, India has become an attractive manufacturing hub globally. Indian industrial companies have registered strong recovery post the second wave of the Delta variant, with robust corporate earnings delivery in 2QFY22. India’s November services Purchasing Managers’ Index (PMI) came in at 58.1, after hitting a decade high of 58.4 in October, indicating that the Indian service sector continued to strengthen.

As per Peeyush Mittal, Portfolio Manager from Matthews Asia, India is likely going to surprise on the upside in terms of GDP growth. He remains optimistic about India’s cyclical recovery, aided by increased infrastructure spending and a likely pick up in private sector capital spending.

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According to Mittal, Covid’s impact on human health and India’s economy will continue to recede in the coming months. Vaccination efforts, a pro-growth budget and very low-interest rates by India’s central government are the major factors that will lead to recovery. “The government is doing a lot from their end in terms of putting in structures and incentives or, in some places, import duties to provide the necessary regulatory landscape for manufacturing in the country to grow,” he stated in a recent market insight.

Furthermore, he sees that the ‘China Plus One’ business strategy of diversifying operations by adding another location outside of China has led to an increased manufacturing activity shift to India. “All these factors should result in increased foreign investment.”

Mittal further explained that cyclical sectors like financials, industrials, and consumer discretionary will be beneficiaries of economic recovery and that the performance of the financial sector should improve meaningfully in the coming quarters.

India’s equity market: best performing EM in 2021

With fundamental support from the nation’s economic growth, India’s equity market has remained among the top performers this year. Despite the early pullback from the pandemic led downturn, the Indian stock market emerged as the best performing emerging market in Asia. According to a report by Motilal Oswal Financial Services (MOFSL) dated 6 December, MSCI India was up 35% YTD (year-to-date) against a 1% rise in the MSCI EM index.

Analysts at HSBC envision a rapid rise in the size of the Indian capital market, “with India accounting for a larger share in global/regional indices over the next 3-5 years”.

As per Goldman Sachs calculations, India is currently the seventh-largest equity market by capitalization among major markets and regions, with about a $3.5tn market cap. Analysts at the financial services company estimate India’s share in the global market cap to rise from the current 2.8% to 3.4% in two years and 3.7% over the next five years. Moreover, they expect India’s market cap to rapidly increase over the next 2-3 years and cross $5tn by 2024.

Furthermore, Foreign portfolio investments (FPIs) has also shown phenomenal interest in India. As per Prime Database, FPIs are presently invested in 1370 listed companies in India, an all-time high number. Presently FPIs hold 21% of all NSE market cap, collectively owning the largest share in listed Indian companies, after promoters (51%).

Not only that, but equity raising through Initial Public Offerings (IPOs) in India for FY22 YTD has also exceeded the previous peak registered in FY18. “Historically, IPOs in India have been listed at a premium of 10-15% on average over the offer price,” said a recent report by Goldman Sachs. It added that 150 private firms could potentially list over the next 2-3 years in India.

India’s equity outlook: Structural corrections

Even though India’s economy is witnessing a sustained pick-up, analysts suggest the stock market is currently taking a breather and investors should be ready for the possibility of a moderate bear phase. Witnessing correction, Nifty has fallen 8% in the last month after touching a record high hit on 18th October.

This is on the backdrop of “rising external vulnerabilities, including concerns of Omicron strain, raising concerns if the market has entered a bear phase. However, this also suggests that the market is no more overheated, and offers selective opportunities,” an HSBC report dated 6 December 2021 stated.

The analysts at the multinational bank added that India’s earnings growth appears robust, and a GDP rebound appears imminent, which make a positive investment case for the market. “We expect the market to recover, led by a macro rebound, a robust earnings outlook, and a rise in credit off-take as private capital expenditure picks up.”

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