India has emerged as a beacon of hope in the face of global economic challenges, while China experiences setbacks and the West grapples with the threat of recession.
With a population of 1.4 billion, India’s gross domestic product (GDP) is set to grow by over 6% for the third consecutive year. This growth is reflected in the performance of the iShares MSCI India exchange-traded fund, which has surged, paralleling the rebound of the S&P 500. Notably, it is domestic investors who are driving this economic surge.
This positive outlook is expected to continue into 2024. Prime Minister Narendra Modi, known for his pro-business reforms and significant welfare initiatives for the underprivileged, is likely to secure a third term in the upcoming spring elections.
Conrad Saldanha, a senior portfolio manager at Neuberger Berman, affirms his belief in India’s long-term growth potential by stating, “I’m a big believer in the structural bull case for India.”
However, despite the optimistic atmosphere, finding undervalued stocks in this bullish market poses a challenge. Indian shares are currently as expensive as their U.S. counterparts, boasting an average price-to-earnings ratio of approximately 25. In contrast, the P/E ratio for global emerging markets is only around 12. Vishnu Gopal, an investment analyst at T. Rowe Price, acknowledges that “India looks pretty expensive on a top-down level.”
Nevertheless, there are ample opportunities within the financial sector to uncover promising investments. Leading private banks, outperforming their state-owned competitors and benefiting from an expanding middle class that is increasingly availing credit facilities, are expected to grow at twice the rate of GDP. Krishna Mohanraj, portfolio manager for international equity at Diamond Hill Asset Management, suggests that these banking stocks are currently undervalued, especially HDFC Bank. Despite the broader market’s 13% climb this year, HDFC Bank’s shares have decreased by 6%. This decline can be attributed to the merger between HDFC’s high-growth mortgage arm and its slower-but-steadier parent company, which has momentarily dampened investor enthusiasm.
India’s remarkable economic trajectory, fueled by its pro-business policies and transformative initiatives, offers potential for both domestic and international investors. By leveraging opportunities in undervalued sectors like the financial industry, astute investors can participate in India’s impressive growth story.
The Potential of the Indian Stock Market
Venkat Pasupuleti and Neil Kansari, portfolio managers at Dalton Investments and Sands Capital, respectively, have their eyes on the Indian stock market. While Pasupuleti prefers ICICI Bank and Axis Bank as strong performers trading at a discount, Kansari casts a wider net with stocks like Britannia Industries, Titan, and Apollo Hospitals Enterprise. He believes these companies have the potential for long-term growth.
However, it is important not to overlook the challenges that India still faces. Gopal from T. Rowe Price warns that India’s GDP per capita is only one-sixth of China’s, sitting at around $2,000. He estimates that only around 100 million Indians can afford luxury items, despite Kansari’s belief in a larger “economically active” population of 700 million.
Prime Minister Modi is determined to narrow the gap with China by boosting Indian manufacturing and infrastructure. This has fueled the performance of companies like Larsen & Toubro, which has seen a more than 60% increase in stock value this year. However, Gopal cautions that Modi’s “production-linked incentives” have been underwhelming so far, with only four out of 14 schemes meeting expectations.
The surge in retail investing has also brought its own risks. Pasupuleti points out that there is a focus on small- and mid-cap companies with varying governance standards, leaving room for potential fraud and stock manipulation.
Despite these challenges, many experts still believe that India is heading in the right direction. Gopal believes that eventually, the number of Indians who live well could reach 500 million, though he refrains from making any predictions about when.