India’s stock market: A rising star in the global economy-Shiv Kumar Sehgal

India’s economic growth has been attracting the attention of investors around the world. The country’s stock market has been outperforming its peers, reaching new heights and breaking records. In the last month, the National Stock Exchange of India surpassed the Hong Kong Stock Exchange to become the seventh-largest equity market in the world, with a market capitalisation of nearly $4tn. This is almost double the value it had at the beginning of 2020. The Nifty 50 index, which represents the top 50 Indian companies, also hit an all-time high this week. -Shiv Kumar Sehgal Chief Analyst of LRO Investment Advisor Limited

-Shiv Kumar Sehgal Chief Analyst of LRO Investment Advisor Limited

United Kingdom, 18th Dec 2023 – India’s economic growth has been attracting the attention of investors around the world. The country’s stock market has been outperforming its peers, reaching new heights and breaking records. In the last month, the National Stock Exchange of India surpassed the Hong Kong Stock Exchange to become the seventh-largest equity market in the world, with a market capitalisation of nearly $4tn. This is almost double the value it had at the beginning of 2020. The Nifty 50 index, which represents the top 50 Indian companies, also hit an all-time high this week.

India’s stock market boom is not a flash in the pan. It is backed by solid economic fundamentals, favourable geopolitical factors and supportive policy measures. India has a strong case for being one of the best investment destinations in the emerging markets. Here are some of the reasons why:

India has a huge and growing population. Earlier this year, it overtook China as the world’s most populous country. By the early 2030s, it is expected to have the largest working-age and middle-class population in the world. This will fuel the demand for goods and services, as well as the need for infrastructure and industrial development. India has been the fastest-growing major economy in the world for the past two years, and this trend is likely to continue. Capital Economics forecasts that India’s annual growth rate will exceed 6 per cent in both 2024 and 2025.

India is well-positioned to benefit from the shifting global dynamics. As China’s economy slows down and faces trade and political tensions with the west, India emerges as a viable alternative for investors and businesses. Many multinational companies are looking to diversify their supply chains and markets by adopting a “China plus one” strategy, and India is a natural choice for them. Apple, for instance, has recently announced plans to increase its production of iPhone components in India.

India has a conducive policy environment for investment. The country has kept inflation and interest rates under control, unlike some other emerging markets. It has also invested heavily in improving its road, rail and renewable energy infrastructure, which enhances its competitiveness and attractiveness. Moreover, India has a vibrant and innovative tech and engineering sector, which offers opportunities for growth and collaboration. With the national elections coming up next year, investors are optimistic about the continuity and stability of the government. Opinion polls and recent state elections indicate that Prime Minister Narendra Modi’s Bharatiya Janata party is likely to secure a convincing win.

However, India’s stock market is not without risks. The current valuations are high by historical and global standards, which may limit the upside potential and increase the vulnerability to corrections. The MSCI India index is trading at 20 times its 12-month forward earnings estimates, which is above its long-term average and higher than the global benchmark. There are also several challenges and uncertainties that could dampen the investor sentiment and disrupt the market rally. Some of these are:

India’s democracy and social harmony are under strain. The country has witnessed a decline in its democratic institutions and civil liberties, as well as a rise in religious conflicts and violence. These could erode the trust and confidence of investors and consumers, and undermine the rule of law and the business environment.

India’s corporate governance standards are questionable. The country has seen several cases of fraud and manipulation involving prominent companies and business groups. One of the most recent examples is the allegation by Hindenburg Research that the Adani group, one of India’s largest conglomerates, engaged in stock manipulation and accounting fraud. The Adani group has denied the charges, but the controversy has cast a shadow over its reputation and performance. More scandals like this could hurt the credibility and integrity of the Indian corporate sector and the stock market.

India’s economic liberalisation is incomplete and inconsistent. The country still has many barriers and restrictions that hinder the free flow of capital and goods. Foreign investors face limits on their ownership and participation in certain sectors and stocks, which makes it difficult for them to manage their portfolios effectively. Domestic companies face protectionist measures and tariffs on imported components, which reduce their competitiveness and efficiency. The country’s demographic dividend could also be squandered if the government fails to provide adequate education and training for the millions of young people entering the workforce.
India’s stock market has been on a remarkable run, reflecting the country’s economic potential and prospects. Investors are betting on India’s growth story, but they also need to be aware of the risks and realities. India’s stock market is a rising star！ 

-Shiv Kumar Sehgal Chief Analyst of LRO Investment Advisor Limited

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India’s stock market: A rising star in the global economy-Shiv Kumar Sehgal