Compared with a year and a half ago, when India’s economy had just begun to reopen after a devastating surge of the Delta variant of SARS-CoV-2, the country’s stock market is unchanged in US dollar terms. And yet, its weight in the MSCI Emerging Markets Index has zoomed past Taiwan and South Korea to second place, with almost the entire gain coming at the expense of the gauge’s biggest constituent: China.
The world’s second-largest economy has seen equities slump by two-fifths since June last year, thanks to Beijing’s isolationist COVID-19 policies, turmoil in the real-estate sector and a punishing antitrust campaign against the country’s valuable tech firms.
If China has been mired in a surfeit of pessimism, the opposite is true of India. Thanks to pent-up urban demand after the COVID-19 pandemic, stocks have held up reasonably well despite the US Federal Reserve’s aggressive monetary tightening.
Illustration: Mountain People
As a result, while China’s share of the MSCI index has slid to 28 percent, from 35 percent in May last year, India’s has risen to 15 percent, from 10 percent.
Will the current reopening of the Chinese economy put an end to India’s outperformance? That is a question for global investors next year.
If other countries’ experiences are any guide, the pivot away from suppressing the spread of the virus toward letting it rip through communities will likely be chaotic, and possibly deadly for China’s elderly, of whom only 40 percent have had COVID-19 vaccine booster shots.
However, a decisive transition might help pull consumer and business sentiment away from near-record lows, shake the property market out of its slumber and accelerate vehicle sales. That might also prompt analysts to bump up their forecast of 4 percent earnings growth over the next 12 months. Before the pandemic, those expectations were at 17 percent.
In India, the pain of COVID-19 — and the gains from reopening — are in the rearview mirror. The economy is now losing momentum, although the market continues to be frothy. Even with some caution getting baked into estimates because of high inflation (hurting margins of local consumer firms) and a global slowdown (affecting software exporters), the consensus expectation is for earnings to rise 18 percent over the next 12 months. Optimism is highest among banks. They are benefiting from higher business volumes and superior pricing. Elevated commodity prices have boosted demand for working-capital loans even as rising interest rates have shored up interest margins.
The case for some rotation away from Indian to Chinese stocks is already firming up. BNP Paribas has downgraded India to “neutral” from “overweight” by removing the country’s consumer staples stocks from its model portfolio and pruning exposure to software exporters.
“Our tactical caution on India arises from the market’s sky-high relative valuations and the possibility of fund reallocations to North Asia with China’s reopening,” BNP Asia research head Manishi Raychaudhuri said.
The consensus opinion on India’s consumption-oriented stocks is probably too optimistic, while the Indian government’s budget — the last before the 2024 elections — could introduce additional volatility, Raychaudhuri added.
In the longer term, India is seeking to buttress its investment appeal by emerging as an alternative to China. With Chinese President Xi Jinping’s (習近平) policies aggravating a rift with the West, Indian Prime Minister Narendra Modi is pitching his country as a destination for multinationals to reduce their overexposure to Chinese supply chains.
There is no guarantee that the gamble, backed by US$24 billion in subsidies for manufacturers, will work.
As Arvind Subramanian, an economic adviser to the Modi administration until 2018, and Josh Felman, a former director of the IMF’s New Delhi office, wrote in an article published by Foreign Affairs on Dec. 9: “India faces three major obstacles in its quest to become ‘the next China;’ investment risks are too big, policy inwardness is too strong, and macroeconomic imbalances are too large.”
Other countries might also have a claim. Vietnam, more open to trade than India, is on track to edge the UK out of this year’s list of the US’ seven largest goods trading partners. The Southeast Asian manufacturing powerhouse did not even figure among the top 15 until 2019.
Besides, regardless of how inviting New Delhi’s policies are on paper, it is not at all certain they will be implemented impartially and not tweaked to benefit national champions — “the giant Indian conglomerates that the government has favored,” Subramanian and Felman wrote.
Just the firms controlled by Gautam Adani, India’s richest businessman, have accounted for one-third of the 33 percent jump, in Indian rupee terms, since last year in the S&P BSE 500, a broad index of the nation’s largest companies.
Throw in rival Mukesh Ambani’s telecoms-to-petrochemicals empire, and half of the gains are spoken for by India’s two wealthiest tycoons.
However, so far a rising concentration of wealth seems to have worked well for local investors — they are neither too skeptical of their country’s destiny, nor too critical of its direction. That is because their prosperity is also hitched to the same bandwagon of pro-capitalist policies.
Four years ago, India’s largest firms posted a combined pretax income of 7 trillion rupees (US$84.6 billion at the current exchange rate), out of which the exchequer took almost one-third. Now, the pretax profit has risen to 13 trillion rupees, but the government’s share has fallen to about one-quarter.
Meanwhile, the relative importance of indirect taxes — including on petroleum products — has grown.
It is not a great outcome for India’s poor, who are hurt more than the rich by levies on consumption, particularly in an inflationary environment, but to the extent the burden of taxation is light on companies, the stock market is unlikely to question the absence of meaningful purchasing power beyond a tiny affluent class.
India’s wage-led economy has become a profit-driven enterprise, and domestic investors seem fine with it.
Over the past five years, India’s managed investments — life insurance, mutual funds, retirement accounts, hedge funds and portfolio services — have grown to 57 percent of GDP from 41 percent, according to Crisil, an affiliate of S&P Global Inc.
As the hunt for yield reaches more of the smaller cities and towns, the US$1.6 trillion industry might not take long to catch up with US$2 trillion in bank fixed deposits.
With net outflows in excess of US$187 billion, global investors’ exit from China this year has been far more brutal than the US$17 billion they have pulled out of India. As China reopens, they are bound to put more money at work there. Even if some of those funds come at India’s expense, it is important to remember that a rapidly swelling pool of local institutional liquidity is eroding the sway of overseas fund managers. As long as “India Inc” delivers reasonable earnings growth, foreigners will not be able to ignore a country where an increasingly muscular domestic investment class has come to worship profit.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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