The Indian stock market, as measured by the MSCI India Index, has demonstrated strong performance in 2024 so far (as of 6th December, source: Bloomberg) with year-to-date return up 20.8%, surpassing both the MSCI emerging markets Index (8.5%) and most of its counterparts in the Asia-Pacific region (MSCI China All Share: 18.3%; MSCI Japan 17.1%; MSCI APAC ex Japan 13.4%). And while past performance is no guide to the future, The MSCI India Index has also to date has delivered double-digit annualized returns over 1-year (24.1%), 3-year (13.3%), and 5-year (16.3%) periods (see table below for emerging market comparisons).
James Thom, who co-manages both the abrdn New India Investment Trust plc and the abrdn SICAV I – Indian Equity Fund, remains optimistic about the future of the Indian market. He attributes this positive outlook to the strong underlying fundamentals that continue to drive growth in the region as he explains in the following Q&A:
What is the outlook for Indian equities?
The outlook for India is positive – it’s one of the world’s fastest-growing major economies that is supported by a resilient macro backdrop. Growth momentum continues to be driven by supportive government policies following a decade of painful, but necessary economic reforms.
The macro backdrop is healthier and will remain supportive. India’s foreign exchange reserves are now at record highs, thanks to conservative policies. This helps mitigate currency risk and the country’s traditional vulnerability to commodity price shocks. India’s fiscal deficit is set to fall below 5% in 2025, supported by a structural uplift in tax revenues. Inflation, at less than 5%, is well under control. Much of the credit for that goes to the Reserve Bank of India.
India’s economy is more efficient and continues to improve. Higher tax revenues mean the government has been able to spend on upgrading power infrastructure, renewable energy, rail, roads and public transport. It’s now much easier to do business in India and to move goods and people between states. Even commuting within cities has become easier for many millions of people.
Corporate India is in better shape. Companies are more efficient, less indebted and growing faster. It is also easier for them to raise capital. Economic growth is translating into corporate earnings – there has been a step change in the speed of earnings-per-share growth. Indian equities are now priced to deliver earnings growth in the mid-teens.
The stock market is more attractive and supported by domestic investors. Domestic flows have accelerated and show no signs of stopping. For example, monthly saving plans and employer pension schemes have grown, providing structural support to the market. Equities form less than 6% of household wealth (compared to 22% in the US). India’s equity market capitalisation is well on the way to hitting US$10 trillion (it’s currently around US$5.5 trillion) . Meanwhile, India’s weighting in emerging market and Asia funds remains relatively modest for the size of the economy.
What are the risks?
There are some near-term external risks, including the implications of ‘Trump 2.0’ on Indian exports, as well as potentially higher energy prices and a slowdown in global economic growth.
As for Trump, we think India is less at risk from US tariffs relative to other Asian economies such as China or Vietnam. However, it is not immune as India’s trade deficit with the United States has grown since Trump left the White House in 2020. That said, we believe the global ‘China + 1’ supply chain diversification strategy will accelerate under Trump once the tariffs kick in and that could provide new opportunities for India in the medium term. Already, the Indian government is pushing measures to position India as a major manufacturing hub.
In November, the US charged Indian billionaire Gautam Adani with fraud, accusing him of orchestrating a bribery scheme and concealing it to raise money in the United States. This development led to a significant market selloff towards the end of November.
However, we believe it’s unlikely to develop into a systemic risk to the market, as the majority of Adani’s funding comes from offshore financing, and the Group has taken steps to deleverage over the last 18 months. Several of the group’s companies also generate healthy cash flows. However, the charges against Adani could affect foreign investor sentiment towards India at a time when we are seeing some pullback in the market. Various factors are driving that, including a temporary slowdown in the pace of earnings growth. We are closely watching that and would expect that pace to recover in 2025. Having said that, domestic investors have continued to back the Indian market, with net flows into the market for 14 consecutive months.
How can investors position in the Indian market?
The key to leveraging this market’s potential is bottom-up stock picking backed by fundamental research. The best way to position would be in high quality and defensive names with better balance sheets, cash flow generation capabilities, and those that are backed by long-term structural tailwinds. We find the best opportunities across six investment themes, which are:
- Aspirational consumption – supported by rising GDP per capita. As the economy grows, the middle classes thrive and demand more goods and services.
- Premiumisation trend – There is also a premiumisation trend as they move to higher-quality options. A pioneering mixed-use developer and the best mixed-use development company in India is also the country’s leading premium shopping mall operator, which is benefiting from a first-mover advantage as the Indian consumer discovers the mall experience.
- Better healthcare – Demand for better healthcare services also increases as wealth rises. Public health experts believe that India’s healthcare system must strike a balance between offering top-notch treatment in upscale urban hospitals and making sure that the vast rural masses have access to suitable medical facilities.
- Urbanisation – Our ‘Building India’ theme incorporates infrastructure development and urbanisation. Some of this depends on government policy but is likely to happen under governments of any kind. Urbanisation is a feature of any fast-growing economy, and India is no exception. For example, we’ve bought into the real estate sector, which is in the early stages of a longer-term recovery. There are also second-order beneficiaries of the housing boom.
- Digitalisation – Digitalisation is also a powerful trend. The country has developed a Digital Public Infrastructure network called the India Stack. This unique initiative is designed to help citizens access their data and information online and for government and businesses to provide targeted digital services to India’s vast population underpinned by thumbprint authentication technology.
- Power crisis – India continues to suffer from chronic power deficits. In May, the government said it was expecting the country’s biggest power shortfall in June in 14 years. Solar photovoltaic and onshore wind deployment is expected to double in India by 2028, which is also creating a range of investment opportunities.
| Annualised performance (as of 6 December 2024) | |||||
| Index | YTD | 1Y | 3Y | 5Y | |
| MSCI India | 20.80% | 24.06% | 13.31% | 16.32% | |
| MSCI China All Share | 18.32% | 19.50% | -8.61% | -0.51% | |
| MSCI Japan | 17.06% | 13.08% | 11.34% | 9.93% | |
| MSCI EM | 8.48% | 13.38% | -3.38% | 1.67% | |
| MSCI APAC ex Japan | 13.36% | 13.34% | -3.38% | 1.67% | |
| MSCI ACWI | 21.61% | 25.20% | 5.88% | 9.54% | |
| abrdn Indian funds | YTD | 1Y | 3Y | 5Y | |
| abrdn New India Investment Trust plc | 24.60% | 26.87% | 9.05% | 12.10% | |
| abrdn SICAV I – Indian Equity Fund | 21.50% | 24.28% | 4.94% | 8.93% | |
Source: Bloomberg. Past performance is no guide to the future.
