Indian equities have had a strong rise, but they have further upside, says the author of this article.

The following article. which comes from Abhinav Mehra, co-manager of the Chikara Indian Subcontinent Fund, sets out the reasons why the manager thinks India’s strong equity market still has further to run. As this publication knows, India’s profile as a wealth management market has risen in tandem with its economic story. The editors are pleased to share these views; the usual editorial disclaimers apply. To respond, email tom.burroughes@wealthbriefing.com

It’s no secret that Indian equities have rallied powerfully over the past year. 

The Nifty 50 – representing India’s largest listed stocks – is up 27 per cent over the period. In comparison, the UK’s FTSE 100 has risen 11 per cent. As it stands, India’s growth is matched only by the US, where the S&P 500 is delivering similar returns.

Recently, the country briefly displaced China as the largest MSCI EM market with a weighting in MSCI global index index of 2.4 per cent vs China’s at 2.2 per cent.

But with some commentators claiming that the rally is over for the time being, the Indian market has much more room to grow. Here are five reasons why:

1) Increasing national wealth
India’s market is being supported by powerful domestic capital flows. The money isn’t just coming from the ultra-wealthy, either – it’s a result of systematic nationwide investment.

Net inflows into Indian equity funds rose to a multi-year high of Rs450 billion ($5.19 billion) in June. They were sitting at Rs441 billion in August. Within these flows, by far the most significant and stable inflows are coming from retail Systematic Investment Plans (SIPs).

SIPS are investment plans held by ordinary citizens. They invest a fixed portion of their monthly salary into equities, currently an average of Rs2,449. This isn’t a large amount on an individual basis. But with monthly payments coming from some 96 million accounts, flows quickly add up.

India’s GDP is on track to more than double by 2031. Market commentators are forecasting that per capita income will rise to $4,952 by 2030 from $1,941 in 2020. Increasing income is likely to correlate with growing SIP contributions and, in turn, equity flows.

2) Household equity allocation
The average Indian household currently only invests 5.8 per cent of its total household assets in equities. This is well below the average allocation for households in developed markets. In the UK, for example, shares and equities account for more than a quarter of total household assets.

As Indians become wealthier, we expect its emerging culture of systematic investment to become more ingrained. As it does so, it is likely that equity allocation as a percentage of household assets will move further towards that of wealthier nations.

Household assets in India total $12.8 trillion. At this level, even a small additional shift into Indian equities could have a powerful impact.

3) Structural growth cycle
A country’s gross fixed capital formation (GFCF) is a measure of net capital expenditure by both its public and private sectors. It’s an important indicator of long-term growth capacity.

India’s GFCF as a percentage of nominal GDP has risen for four consecutive years now. It is expected to reach 31.5 per cent in FY 2025 – a little shy of the record 35.8 per cent hit in FY 2008. However, with funding for private projects growing, we believe that the figure could hit new record highs over the coming years.

The rise is indicative of a private sector capex cycle. The last time this happened – between 2002 and 2008 – India’s stock market enjoyed considerable outperformance in Asia.

4) Attractive large cap multiples
Indian stocks climbed to a record high in September. The jump was supported by flows among foreign investors seeking alternatives in anticipation of a prolonged US rates cut. Thanks to the relative attractive valuations of large caps, we expect India’s popularity among such investors to endure.

One-year forward price/earnings ratios in the Nifty Mid Cap 100 index have risen considerably in the last couple of years. Yet large cap valuations in the Nifty 50 have remained largely the same with a current one-year forward PE ratio of 21 times earnings, suggesting that their strong performance has been earnings driven.

5) GEM investor underweight 
Global Emerging Market investors have been selling India consistently over the last couple of years because of valuation concerns. But the nation’s strong performance has led its benchmark weighting to increase from 7.7 per cent in March 2020 to 20.7 per cent at present.

The net result is that GEM investors are now actually running a small underweight in India. Given the country’s continued, marked, outperformance against other emerging markets, the position will need to be addressed.

It seems likely that, were India to experience any period of underperformance, GEM investors could use the opportunity to cover their underweight. The buying would offer yet more support for the market beyond increasing domestic flows alone.