Indian equities are expected to attract additional foreign inflows following the general elections, driven by the promising growth outlook of the economy and the Federal Reserve's rate cuts serving as catalysts, according to Rajiv Batra of JPMorgan Chase & Co. Batra suggests in an interaction with Bloomberg that global funds' exposure to India's $4.3 trillion stock market remains relatively low, and investors will likely view any market corrections as opportunities to bolster their holdings.
These insights emerge amidst heightened volatility in overseas flows ahead of the national vote, amidst apprehensions regarding stretched valuations.
“Foreign investors who didn’t increase relative positioning in India over last 2-2.5 years waiting for this clearing event, will start focusing back on growth-driven policies or reforms,” Batra, an Asia strategist at JPMorgan, told Bloomberg.
In line with Goldman Sachs Group Inc., JPMorgan forecasts increased inflows into the market, as Prime Minister Narendra Modi is widely anticipated to secure another term in office. A potential third term for Modi is perceived as ensuring the continuation of market-friendly policies, substantial investments in infrastructure, and efforts to encourage foreign direct investment.
The general elections in India are scheduled to take place over a span of six weeks beginning April 19, with the vote count slated for June 4.
According to Batra, investors will closely monitor the seat-sharing agreements, particularly if Modi's ruling party secures another term in power. He emphasised the significance of policy consistency for India's market to maintain its elevated valuation or potentially experience further multiple re-ratings.
As per data from the National Securities Depository Ltd., the holdings of Indian stocks by global funds amounted to $763 billion by the conclusion of February.
Batra noted that increasing investor interest in India generates a "virtuous cycle" encompassing liquidity, sell-side coverage, investor engagement, and capital issuance. “We estimate that if all benchmarked investors (EM, Asia ex-Japan, global ex-US and global) simply close their underweight positions on India, this would lead to $100 billion in inflows over the next few years,” he said.
Since the latter half of last year, foreign flows have exhibited irregular patterns, influenced by an incessant surge in the stock market that propelled valuations to higher levels. The benchmark NSE Nifty 50 Index is now perilously close to wiping out all its gains for the current year, following a record-breaking eight-year winning streak in 2023. Additionally, concerns have arisen regarding speculative froth accumulating in the small- and mid-cap segments.
The Indian gauge is presently trading at 20 times its one-year forward earnings estimates, in contrast to the multiple of 12 times observed for the MSCI Emerging Markets Index. Nevertheless, numerous investors contend that India warrants a higher premium in comparison to both historical levels and emerging-market counterparts, attributing this to the economy's superior growth potential, favourable demographics, and the assurance of political stability.