Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
Key takeaways:
- India’s equity markets are significantly increasing as a proportion of the emerging market equity universe due to the latest MSCI rebalancing. This is a strong indicator of India’s increased importance particularly relative to China.
- The MSCI rebalancing will likely be a catalyst for increased portfolio flows into India, further enhancing the market’s expansion potential. India has several growth drivers including a growing consumer base, a digital revolution, a manufacturing surge and infrastructure development.
- We see investment opportunities in financial services, technology and digital services, consumer discretionary and infrastructure and industrials.
MSCI rebalancing: A boost for India’s markets
The recent MSCI Emerging Markets Index rebalancing is a substantial development for India’s equity markets, in our view. Global funds tracking these indexes will need to increase their allocation to Indian equities, which could lead to a surge in liquidity and positive price impacts. Since 2020, India’s weight in the MSCI Emerging Markets Index has doubled to nearly 20%, while China’s allocation has decreased from 42% to 24% (see Exhibit 1). This shift underscores India’s growing influence in the global investment landscape and could drive an estimated US$3 billion in capital inflows,1 likely benefiting underrepresented sectors.
Exhibit 1: Growing Influence of Indian Equities
India’s structural growth drivers
India’s long-term market potential is underpinned by several key trends we see:
- Rising incomes and consumption: A rapidly expanding middle class (expected to double to over 60% of population by 20472) is fueling consumption growth, especially in premium goods and services. This demographic shift should continue to be a major driver for consumer goods, retail and financial services.
- Digital revolution: India’s digital transformation, bolstered by affordable data and widespread digital payments, opens new opportunities in e-commerce, fintech, and digital services. We believe these sectors look poised for sustained growth as digital penetration increases.
- Manufacturing surge: Structural reforms and geopolitical shifts are positioning India as a rising manufacturing hub, particularly in both the technology and industrial sectors.
- Infrastructure development: Government-led projects in infrastructure, such as smart cities and improved connectivity, are expected to drive growth in construction, materials and related industries.
Indian risks and impact
The Indian banking sector’s loans have grown at a faster pace as compared to deposits. Consequently, bank lending as a percent of gross domestic product (GDP) is at a level higher than pre-pandemic. With India’s central bank raising concerns, this could bring a crackdown on household credit, impacting consumption spending.
Additionally, the slowdown in government spending after the June elections likely dragged GDP growth for the April to June 2024 quarter.3 The government’s aim for fiscal consolidation could further curtail government spending. The government is targeting a fiscal deficit of 4.9% of GDP for the current fiscal year ending March 2025 and 4.5% of GDP for the fiscal year 2025-2026.4 The fiscal deficit for the year ending March 2024 was 5.6% of GDP.5 While the fiscal consolidation is expected to be offset by the government’s asset sales, any net reduction in government spending could impact GDP growth.
India’s long-term growth story
The post-election environment in India has set the stage for continued economic reforms and stability. In our view, the country’s political will and policy initiatives are creating a favorable environment for business and investment. The structural reforms introduced over the past decade have improved governance, streamlined regulations, and made India a more attractive destination for global capital.
India’s equity market performance has mirrored its GDP growth, reflecting the country’s increasing share of the global economy. As India continues its journey toward becoming the world’s third-largest economy by 2030, as per S&P Global Ratings,6 we believe the equity markets are likely to see sustained interest from both domestic and international investors.
Strategic investment opportunities
Key sectors we see benefiting from India’s growth trajectory include:
- Financial services: Rising incomes and digital innovation are driving demand for financial products.
- Technology and digital services: India’s leadership in IT and digital sectors positions them for continued growth.
- Consumer discretionary: The expanding middle class is shifting toward higher-end consumption which benefits consumer goods and retail sectors.
- Infrastructure and industrials: Government projects and urbanization have fueled long-term growth in construction and materials.
Conclusion
India’s equity markets are experiencing a sustained expansion, supported by economic reforms, strategic initiatives, and growing global investor interest. We believe the MSCI rebalancing is an important catalyst, likely to bring significant and lasting capital inflows. For investors, a diversified approach that capitalizes on India’s structural growth drivers, while being mindful of global risks, offers a compelling long-term opportunity.
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.
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1. Source: “India’s weight on key MSCI equity index rises to record high; $3 bln inflows likely.” Reuters. August 13, 2024.
2. Source: “Indian middle class will nearly double to 61% by 2046-47: PRICE Report.” India Brand Equity Foundation. July 2023.
3. Source: “India’s growth likely slowed to 6.9% last quarter as government spending lagged.” Reuters poll. August 25, 2024.
4. Source: “India lowers fiscal deficit target to 4.9% of GDP for FY25.” Reuters. July 23, 2024.
5. Source: “India’s FY24 fiscal deficit improves to 5.63% of GDP, narrower than government’s target of 5.8%.” Mint. May 31, 2024.
6. Source: “India to be world’s third-largest economy by 2030 -S&P Global Ratings.” Reuters. December 5, 2023.
