Beyond Bulls & Bears

Emerging Markets

India’s post-election growth outlook and investment opportunities

Following the results from India’s weeks-long elections, Hari Shyamsunder, Senior Client Portfolio Manager for Franklin Templeton Emerging Markets Equity, discusses the implications of the electoral outcome. Hari also explores the key trends stimulating India’s economic growth and its long-term investment outlook.  

Implication of election results

India is on the path to becoming the world’s third-largest economy by 2027, according to the International Monetary Fund (IMF).1 What are the implications of the electoral outcome on the country’s economy and stock market? We believe that reforms are entrenched, and India continues to be a long-term structural growth story.  

Long-term equity market outperformance

Over the past three years through April 30, 2024, India’s stock market, as measured by the MSCI India Index, has been performing well in absolute terms and relative to the MSCI Emerging Markets Index and the MSCI All Country World Index (ACWI).2 India’s outperformance against its emerging market peers also extends further to nearly 30 years from May 31, 1994, through April 30, 2024.3

The long-term outperformance of India’s stock market mirrors India’s gross domestic product (GDP) growth. India’s share of global GDP has increased from 1.1% in 1993 to close to 3.5% in 30 years.4 The rise of India is clearly not a short-term phenomenon, but something that has been building up steadily over a longer time frame.

Key economic trends

Since the Indian stock market has had a strong correlation with economic growth, we see several key trends that should stimulate India’s economy.

  • Rising incomes. Rising incomes combined with a young population should drive consumption. We expect India’s wealthy and middle-class populations to expand by 400 million people.5 In particular, the number of people in India’s wealthiest class could grow three-fold, and this will mark the creation of a new consumption category, the premium category, which India has not had much of so far. Consequently, we see the consumption of premium products and services continuing along a rapid trajectory.
  • Structural reforms. India has long been an interesting market for global brands, but to create more jobs, it has needed to attract investments. In the past 10 years, the government has implemented structural reforms to strengthen the country’s governance and investment frameworks—improving India’s business climate and making it an easier place to do business. Examples include the e-Way Bill system that has reduced logistics costs and unified India as investment destination, the Jan Dhan-Aadhar-Mobile (JAM) or “India Stack” that has enabled better targeting of subsidy programs to the end beneficiaries, cuts to corporate taxes rates that have brought the rates on par with other manufacturing countries, and debt resolution through the creation of the Insolvency and Bankruptcy Code.
  • Digital transformation. One of the notable stories of the past decade has been India’s digital transformation. In 2015, the country’s Internet penetration was among the lowest in the world, and that stunted the development of opportunities such as e-commerce. Today, India has among the largest populations online globally. Ultra-low-cost-data tariffs and the widespread adoption of the Unified Payment Interface (UPI) has led to a sharp growth of online shopping of goods and services.
  • Manufacturing upgrades. India has not historically been known for manufacturing due to its difficult business environment. In 2022, manufacturing contributed only 13% to GDP compared to China, Vietnam and Bangladesh, where that figure was around 20%–30%.6 Structural reforms, infrastructure investments, production-linked incentives and geopolitical factors are changing the outlook for Indian manufacturing. We now see opportunities associated with India’s manufacturing upgrades. For instance, the significant increase in mobile phone production and exports is an early sign of success for the broader production-linked incentives scheme. Thus, we are optimistic about India’s emergence as a global manufacturing hub in the future.

Global risks

The global liquidity and interest-rate cycles are in flux. Sharp changes can lead to market corrections. Additionally, the geopolitical environment is volatile, with numerous potential flashpoints. We believe the world is entering uncharted waters on this front.

India’s long-term growth story

Regardless of the elections, we believe a confluence of factors has put India on a strong foundation for long-term growth. The country has seen a combination of policy and political will that we believe would result in continued reforms and a period of macroeconomic stability. The stage has already been set for exports to drive growth and a new class of consumers to emerge.

 

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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1. Source: “India will be world’s third largest economy in 4 years: IMF chief economist.” India Today. September 10, 2023. There is no assurance that any estimate, forecast or projection will be realized.

2. Source: MSCI. The MSCI India Index is designed to measure the performance of the large-and mid-cap segments of the Indian market. With 136 constituents, the index covers approximately 85% of the Indian equity universe. The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging market countries. With 1,375 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI ACWI captures large- and mid-cap representation across 23 developed market and 24 emerging market countries. With 2,840 constituents, the index covers approximately 85% of the global investable equity opportunity set. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.

3. Ibid.

4. Sources: International Monetary Fund, April 2024 World Economic Outlook, World Bank Data.

5. There is no assurance that any estimate, forecast or projection will be realized.

6. Source: World Bank. As of 2022.

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