India’s stock market soars, attracting domestic and foreign investors

Until the pandemic, the Indian stock market was like another world that Dilip Kumar never had a reason to visit. But like so many other people around the world who were stuck at home, he began to see it as the place to be.

Mr Kumar, a proposal administrator at an engineering company in New Delhi, set up a free stock trading account through Zerodha, India’s largest online brokerage firm, and invested some of his savings in Indian Railways as well as a clothing retailer and a cinema chain. .

“I invested in all the things I used on a daily basis,” he said. Since then, he’s gotten “a big comeback in a short time” – more than doubling his money in just over a year.

Many more want in on the action.

India’s booming stock market is attracting both local novices and global investors to the shares of the financial, industrial and technology companies that dominate its listings. The MSCI India index is up around 30% this year, nearly double the return of the global index, while India’s 30-stock benchmark S&P BSE Sensex is up around 25%. The two have posted a seemingly never-ending series of records, soaring on factors such as simple demographics, government and fiscal policy, and geopolitical shifts.

The craze can be read from the IPO this week of the parent company of the digital payment platform Paytm. The company achieved its goal of raising $2.5 billion, making the bid the largest in the country’s history and valuing the company at more than $20 billion. The offer highlighted the dynamism of the financial and technological sectors in a country where the majority young population embraces digital start-ups.

Meanwhile, Prime Minister Narendra Modi’s government is trying to make India more self-sufficient, a boon for domestic businesses offering everyday goods and services, while trying to attract more citizens – and their money. – in the formal economy. And this spring, India’s central bank embarked on a bond-buying program that’s a smaller version of the kind that has driven stocks around the world higher.

Combine these factors and it’s a recipe for a retail investor boom: according to the Securities and Exchange Board of India, new securities holding accounts are at an all-time high.

“There is pent-up demand among the upper middle class, which is rushing into the market,” said Jiban Mukhopadhyay, professor emeritus of business economics at SP Jain Institute of Management and Research.

Their confidence has been bolstered by the huge stakes foreign institutional investors are taking in companies that went public this year. The Abu Dhabi Sovereign Wealth Fund, the Texas Teachers’ Pension Fund and the University of Cambridge have invested more than $1 billion in Paytm in total.

One reason: Foreign investors have recently soured on China, long the destination for those seeking high yields, as growth there slows and a powerful central government cracks down on big tech companies.

“India really stands out this year, with China decelerating,” said Todd McClone, portfolio manager at William Blair’s Emerging Markets Growth Fund. His fund sharply reduced its allocation to China, shifting much of that money to Indian stocks, including conglomerate Reliance Industries, paint maker Asian Paints and specialty chemicals company SRF.

“With accelerating growth, lots of good companies, and all the demographics behind it, I think it’s given people a lot of confidence to come back to this market,” he said.

How sustainable the rally will be remains to be seen. Emerging markets like India can often be at the mercy of decisions made by investors on the other side of the globe. Oil prices are soaring, posing a particular challenge for India, a major importer.

Economists also point to an uneven recovery from the pandemic that has pushed many Indians back into poverty. The economy plunged 21% during India’s first lockdown, small and medium-sized businesses that employ most of India’s workforce continue to falter and the government is spending billions of dollars to mop up the numbers increasing number of bad bank loans.

But investors remain optimistic: Wall Street analysts expect Indian companies to grow earnings by more than 22% over the next 12 months – calculated in dollars – a faster pace of growth than benchmarks in China or the United States.

“Share prices follow earnings and Indian companies have the strongest fundamental momentum“, said Brian Freiwald, emerging markets portfolio manager at Putnam Investments in Boston.

Part of the reason for the rapid rise of the Indian market can be attributed to 2016 and a policy of demonetization. Intended to combat money laundering, the policy banned the most widely circulated banknotes and wiped out the savings of families and small businesses overnight. But it has also bolstered companies like Paytm, an industry that has benefited further as the pandemic has disrupted face-to-face transactions.

The market-friendly measures put in place by Indian policymakers are adding to this momentum. In February, Mr Modi’s government proposed a budget that called for more spending on health care and infrastructure. Then, two months later, the Reserve Bank of India launched the same type of quantitative easing programs that the Federal Reserve and other central banks have put in place to support their national economies. Although it launched its bond-buying program more than a year after the launch of the Fed’s, India received a similar stock market response: stocks took off.

For global investors, it was a stark contrast to what was happening in China, which had already experienced a rapid recovery from its pandemic shutdowns. Chinese policymakers began withdrawing some of their support for the economy earlier this year. Growth has started to slow – down to just 4.9% in the third quarter – putting pressure on indebted companies that rely on continued rapid growth to pay their creditors. At the same time, the Chinese government, under the increasingly centralized power of President Xi Jinping, has begun to rein in some of the country’s most important tech companies.

It has been an unattractive backdrop for investors, and Chinese markets have posted some of the worst returns in the world this year.

India tends to do well when there is a problem in China,” said Divya Mathur, emerging markets portfolio manager at fund management firm Martin Currie in Edinburgh.

As rapid as India’s market gains are, they remain fragile, experts say.

Emerging markets like India can take detours as global investors who have invested money can withdraw it quickly, especially when central banks raise interest rates and attract investor capital. India was hit by such a situation in 2013: when the Federal Reserve began to withdraw from low interest rate policies after the 2008 financial crisis, investors withdrew their money from India. Its currency, the rupee, plunged to a new low against the dollar and pushed the country to the brink of a financial crisis.

Fundamental demographic challenges also lie ahead. Young people who have helped accelerate the country’s adoption of new technologies will pressure the government to maintain rapid economic expansion. More than a quarter of India’s population – more than 360 million people – is under the age of 15, according to the World Bank.

“As this young population matures, can India provide enough job opportunities?” asked Ajay Krishnan, a portfolio manager specializing in emerging markets at Wasatch Global Investors in Salt Lake City.

The pandemic also remains a threat: About a quarter of India’s population is fully vaccinated, leaving it vulnerable to a new surge in cases that could cause more economic damage and push more citizens into poverty.

Mr Mukhopadhyay, an economics professor, said the momentum is a sign that market returns are not an indicator of broader prosperity.

“The Indian stock market is acting like a pampered child,” he said. “It has almost nothing to do with the movement of the economy.”

Samir Yasir contributed report.

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