With voting now closed in India, Prime Minister Narendra Modi is expected to win a historic third term when the election results are announced tomorrow. But what does all this mean for investment opportunities after the world’s largest election?
After experiencing strong economic growth and significant stock market gains in recent years, investors see no signs of a slowdown in India’s positive momentum. Below, three investment professionals outline the prospects for India and its equity market during Modi’s third term and beyond.
Commenting on the Indian economy and forthcoming election result, Anh Lu, portfolio manager of the T. Rowe Price Asia ex-Japan Equity strategy, said:
“India’s economy has been on a rapid upward trajectory over the past few years and the future looks bright. With a burgeoning population, a dynamic and youthful workforce, and advancements in technology, India is poised for further transformative changes to help shape its economic and social landscape. The government’s ambitious initiatives such as ‘Make in India’, ‘Digital India’, and ‘Startup India’ are driving innovation, entrepreneurship, and job creation – positioning India as a global economic powerhouse.
“Put simply, India is a good news story – the economy is doing well, companies are doing well, and the stock market has been doing well. The country’s prospects are bright. The challenge for us as investors is centred largely around valuations.
“Investors are currently willing to pay a premium for Indian companies. Underpinning the stock market’s recent run has been a vibrant domestic, retail investor market. For the first time, domestic retail investors now own more of the market than foreign investors.
“With India’s economy recovering strongly after Covid, the best-performing part of the stock market has been in the more cyclical areas, typically in the small and midcap space, where retail investor inflows have pushed the valuations of many stocks to record highs. Within the context of India being an expensive market, we find the most attractive opportunities today in blue chips, notably the banks, which we feel offer durable earnings growth and trade on reasonable valuations having been somewhat overlooked by the market.”
Also commenting, Darius McDermott, managing director of FundCalibre, said:
“Prime Minister Narendra Modi’s policies have transformed India in the past decade. The numbers speak for themselves – at a time when growth has been challenging across the globe, GDP in India stood at 7.8% in 2023 and is projected to grow by 6.8% and 6.5% in 2024 and 2025, respectively. Investors in Indian equities have seen returns to the tune of 216% since 2014, compared to just 63% for Chinese equities.
“If you were to do a pros and cons for investing in India it would be heavily lopsided in favour of the former. Strong demographics, growth, few geopolitical concerns, strong corporate governance, and the growing online economy all come to mind. The trouble is the investment world has spotted the trend, which brings us to the one negative – valuations. Indian equities historically trade at a 40% premium to other emerging markets, but it was closer to 70-80% in April.
While India is expensive versus other emerging markets – there are reasons. The growth has been justified given the likes of urbanisation, attractive demographics, and the rise of digitisation. By contrast, the likes of China and Korea face demographic and corporate governance challenges.
“India’s growth in the past decade has been phenomenal, but investors must remember the base this growth started from. With a population of more than 1.4 billion people – consumption, infrastructure, urbanisation and digital expansion are still in the early stages – paving the way for a multi-decade growth story.”
Mali Chivakul, emerging markets economist at J. Safra Sarasin Sustainable Asset Management,
“The elections are taking place on the back of a strong and stable economy. However, growth remains uneven, with consumption significantly trailing investment, and private investment trailing public investment.
“India’s labour force participation rate has not recovered to its pre-Covid level. The latest figure from 2023 shows urban and rural labour force participation rates at 39% and 40% respectively – dropping from 44% and 46% in the early days of Prime Minister Narendra Modi’s first term. India’s robust growth has clearly not delivered enough jobs.
“India is one of the countries that should benefit from manufacturing supply chain diversification. Recent FDI in the telecom/electronics sector has already contributed to exports and is growing rapidly. Still, they only account for about 4% of total exports.
“Manufacturing in India has become more capital-intensive over time. For example, the share of textiles, apparel and leather products has declined from 14% in 2013 to 11% of total manufacturing value-added in 2022. At the same time, the share of machinery and equipment manufacturing has remained at around 20% throughout the last 10 years. The Indian government’s recent emphasis on attracting more investment in semiconductors suggests this trend may continue to the detriment of mass job creation.
“India’s share of working-age population is projected to peak around 2030, which is the end of the next government’s term. This makes the labour reform agenda even more pressing today so that India can reap the benefit of its demographic shift.”
