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Much of that money is now heading to India, with Wall Street giants like Goldman Sachs Group Inc. and Morgan Stanley eyeing the South Asian country as the top investment destination for the next decade.
This momentum triggers a gold rush.
$62 billion hedge fund Marshall Wace has positioned India as its biggest net long bet after the US in its flagship hedge fund. A subsidiary of Zurich-based Vontobel Holding AG has made the country its largest emerging markets holding and Janus Henderson Group Plc is exploring acquisitions of fund companies. Even Japan’s traditionally conservative retail investors are turning to India and reducing their exposure to China.
Investors are paying attention to the contrasting trajectories of two of the greatest Asian powers. India, the world’s fastest-growing major economy, has significantly expanded its infrastructure under Prime Minister Narendra Modi in a bid to lure global capital and supply lines away from Beijing. China, for its part, is grappling with chronic economic woes and a growing divide with the Western-led order.
“People are interested in India for several reasons: one is simply that it’s not China,” said Vikas Pershad, Asian equity portfolio manager at M&G Investments in Singapore. “There’s a real long-term growth story here. »
Although bullish sentiment toward India is not new, investors are now more likely to see a market that resembles the China of old: a large, dynamic economy that is opening up in new ways to world money. No one expects a smooth ride. The country’s population is still largely poor, stock markets are expensive and bond markets are insular. But most still make the crossover, believing that the risks of betting against India are greater.
History shows that India’s economic growth and the value of its stock market are closely linked. If the country continues to grow at a rate of 7%, the market size is expected to grow on average by at least this rate. Over the past two decades, gross domestic product and market capitalization have increased simultaneously, from $500 billion to $3.5 trillion.
Aniket Shah, global head of environmental, social and governance practices at Jefferies Group LLC., said a recent investor call regarding India was one of the company’s most closely watched.
“People are really trying to understand what is happening in India,” he said.
Follow the money
Capital flows reflect this enthusiasm. In the U.S. exchange-traded fund market, the top fund buying Indian stocks received record inflows in the final quarter of 2023, while the four largest Chinese funds combined saw outflows of nearly $800 million. Active bond funds have invested 50 cents in India for every dollar withdrawn from China since 2022, according to EPFR data.
In mid-January, India briefly overtook Hong Kong to become the world’s fourth-largest stock market. For some investors, the South Asian nation will only grow. Morgan Stanley predicts that India’s stock market will become the third largest by 2030. Its weighting in MSCI Inc.’s benchmark index for developing market stocks hits a record 18%, even as the share of China declined to its lowest level. recorded at 24.8%.
“In terms of index weightings, China would be smaller and India larger,” said Mark Matthews, head of Asian research at Singapore-based Bank Julius Baer, which launched its all first Indian fund last year. “It’s the direction.”
New investors
Japanese retail investors, who have traditionally favored the United States, are also interested in this country. Five of their India-focused mutual funds are now among the top 20 in terms of cash flow. Assets of the largest – Nomura Indian Stock Fund – are at their highest level in four years.
Hedge funds including Marshall Wace cite India’s strong growth and relative political stability as reasons to remain optimistic about consistent pockets of growth, even as the market as a whole still commands high valuations.
Karma Capital, which manages money in India for institutions like Norges Bank, says U.S. investors are particularly eager to enter and learn more about the market. Rajnish Girdhar, managing director of the fund, recalled that a client had responded with unusual speed to several requests in India.
“We would send something on Friday and before we got back Monday morning she would have responded, meaning she was working the weekend,” he said.
Old rivalry
India has benefited from the changing power dynamic with China, a decades-long rival.
If China is seen as a threat to the Western world order, India is seen as a potential counterweight – a country increasingly equipped to assert itself as a viable manufacturing alternative to Beijing. Countries like the United States see the need to maintain strong trade ties with India, even as they have criticized the country’s tax policies. India now accounts for more than 7% of global iPhone production and is investing billions of rupees in infrastructure upgrades.
These efforts are part of Modi’s plan to sell India as the new engine of global growth. The government will increase infrastructure spending by 11 percent to 11.1 trillion rupees ($134 billion) in the next financial year, Finance Minister Nirmala Sitharaman said last week in her interim budget speech. .
“The investment cycle is accelerating with public capital spending and infrastructure initiatives,” said Jitania Kandhari, deputy chief investment officer for the solutions and multi-asset group at Morgan Stanley Investment Management.
India is also building a large technology ecosystem aimed at attracting more people to the digital market. Alphabet Inc.’s Google Pay plans to work with India’s mobile payment system – which generates billions of transactions every month – to expand its services beyond the country.
“For the first time, hundreds of millions of Indians have bank accounts and access to credit,” said Ashish Chugh, fund manager at Loomis Sayles & Co. “This is bound to attract global companies to India – and with them global investors too.
A prize for perfection
Some obstacles persist. The euphoria has made Indian stocks among the most expensive in the world. The popular S&P BSE The Sensex index has almost tripled from its March 2020 low, while profits have only doubled. The metric trades at more than 20 times forward earnings, or 27% more expensive than the average for the 2010 to 2020 period.
Tight valuations and Beijing’s recent attempts to prop up its markets have prompted some investors to consider a change in strategy. Global funds withdrew more than $3.1 billion from local stocks in January, the largest monthly total in a year, according to data compiled by Bloomberg.
“Indian markets are pricing in huge success,” said Mark Williams, fund manager at Somerset Capital Management. “But the question is to what extent this is not taken into account. There is certainly a risk that Indian markets could collapse for a few years.”
Investors are bracing for a correction after eight straight years of annual gains in local stocks. Modi is expected to win a third term in this year’s national elections, especially after his party’s recent state polls indicated current policies would continue. But a weakened ruling party could shake up markets in the short term.
“Given the way the results of the national elections played out, it seems that we should ensure continuity in government. But you should never say never,” said Peeyush Mittal, portfolio manager at Matthews International Capital Management LLC.
Modi’s social agenda, which his critics say favors the country’s Hindu majority, also threatens the stability of a country with more than 200 million religious minorities. Transforming India’s potential into an economic reality that benefits all citizens is a difficult task, especially in a multilingual democracy with large cultural differences between states.
“India still has a long way to go,” said Charles Robertson, head of macro strategy at FIM Partners Ltd. “The potential growth peak is still lower than that achieved by China.”
The big picture
Even with these risks, Indian fans say they are investing for the long term. With per capita income still low, the country is setting the stage for multi-year expansion and new market opportunities, they say.
“There is always the possibility of scandals, social polarization and political noise,” said Aninda Mitra, head of Asia macroeconomic and investment strategy at BNY Mellon Investment Management. “Despite all this, if you believe the economy is poised to grow to over $8 trillion within the next decade, the volatility is worth it. »
India’s once-insular financial markets will continue to open up. With foreign participation just over 2%, the $1.2 trillion domestic sovereign bond market is added to JPMorgan Chase & Co’s global debt index starting in June. The move could attract up to $100 billion in capital inflows in the coming years, according to HSBC Asset Management.
India is also stepping up efforts to globalize the rupee, albeit on a more modest scale than China’s yuan expansion. Yet the potential is there when combined with the government’s development of GIFT City – a free-market pilot project in western India that aspires to become a global financial hub free from rules and taxes. This prospect echoes the opening of Shenzhen in 1980 as a special economic zone.
Confidence in India stems from the long-term impact of such initiatives, not necessarily the short-term outlook on the country’s stocks and bonds, according to Gaurav Narain, a fund manager who advises the India Capital Growth Fund.
“We no longer need to promote India’s history,” he said. “This is ’embracing India’ by people who are aware of the positive changes.”
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