Following the general elections, Indian equities are expected to attract additional foreign inflows, with the economy's positive growth prospects and the Federal Reserve's rate decreases serving as catalysts.
Rajiv Batra of JPMorgan Chase & Co. believes foreign funds' positioning in India's $4.3 trillion stock market is low, and investors will take any correction to expand shares. His comments come as offshore flows have gotten increasingly turbulent ahead of the national election, amid concerns over stretched values.
“Foreign investors who didn’t increase relative positioning in India over last 2-2.5 years waiting for this clearing event, will start focusing back on growth-driven policies or reforms,” Batra, an Asia strategist at JPMorgan, wrote in an email interview.
Goldman Sachs Group Inc. in predicting more inflows as Prime Minister Narendra Modi is It is commonly expected that he will extend his decade of power. A third term for the leader is expected to witness the continuance of market-friendly policies, infrastructure spending, and an increase in foreign direct investment.
India will hold general elections over six weeks beginning April 19, with votes counted on June 4. Investors would closely monitor seat-sharing agreements if Modi's ruling party keeps power, according to Singapore-based Batra, who added that policy consistency is critical for India's market to maintain its higher valuation or "even witness further multiple re-rating."
Batra stated that increased investor interest in India is resulting in a "virtuous cycle" of liquidity, sell-side coverage, investor involvement, and capital issuance.
“We estimate that if all benchmarked investors (EM, Asia ex-Japan, global ex-US and global) simply close their underweight positions on India, this would lead to $100 billion in inflows over the next few years,” he wrote.
According to data from the National Securities Depository Ltd., global investors had $763 billion in Indian stocks as of the end of February. Foreign flows have become unequal since the second part of last year, as the stock market's unrelenting surge has pushed values higher. The benchmark NSE Nifty 50 Index is on the cusp of reversing all of its gains for the year after ending a historic eight-year winning streak in 2023, and there are concerns about speculative froth rising in the small- and mid-cap space.
The Indian gauge trades at 20 times its one-year forward profit expectations, compared to 12 times for the MSCI Emerging Markets Index.
Nonetheless, many investors believe that India deserves to trade at a bigger premium compared to the past as well as emerging-market counterparts, given the economy's superior growth potential, favorable demographics, and the promise of political stability.
Global funds are "keen to raise exposure to India and are looking for better entry points," said Sunil Koul, Goldman Sachs' Asia Pacific equity strategist. "We expect foreign flows to pick up in the latter half of the year, given elections will be behind us and the overall liquidity environment will be supportive for EM flows, with central banks easing and a weaker dollar."
