By Conrad Saldanha, CFA
Despite recent market volatility during the latest election season, we think India’s equity market could hold attractive opportunities for long-term investors.
India just put on the globe’s largest democratic display: 642 million voters participated in the country’s June elections. The ruling Bharatiya Janata Party (BJP) party – led by two-time Prime Minister Narendra Modi – lost its outright majority, despite overly optimistic exit polls that initially drove India’s equity markets higher before quickly retreating in the wake of BJP’s lackluster performance.
So where do Indian equities go from here?
The Modi-led administration has said it aims to team up with two junior parties of the National Democratic Alliance (NDA). While we believe the new coalition government could maintain many of the BJP’s policies, we also expect plenty of concessions and appointments of key ministry positions along the way.
From a policy perspective, the new government may have to balance its recent focus on infrastructure investment with efforts to boost disposable income at the lower end of the economic pyramid, where consumption has been slowing. And while recent fiscal discipline has helped support the historically weak Indian Rupee, past coalition governments have tended to demonstrate less restraint.
In our view, the market volatility surrounding the election has created attractive opportunities for active managers, especially among small-and- mid-cap companies caught up in headline-driven trading. Furthermore, we believe local retail investors – who have been net buyers over the last few years via systematic investment plans – should stay the course despite the tumult.
Stepping back, we believe India continues to benefit from various economic tailwinds. First, various projects now underway are poised to increase the government’s infrastructure allocation to $132 bn in fiscal 2025 – triple the figure just five years earlier1.
Second, major global consumer-electronics brands, including Apple (AAPL), have been widening their Indian manufacturing footprints2. Third, we believe digital financial reforms – such as real-time direct transfer payments and widespread banking access (now close to 100%) – could sustain mid-single-digit economic growth rates while unlocking new investible business models.
For these reasons and more, we think India’s equity market could offer attractive opportunities for long-term investors.
Specific areas of interest to us include contract manufacturing, health care services and vehicle financing; less appealing, in our view, are more commoditized sectors, especially those linked to either stressed consumer subsegments or to global IT services, where artificial intelligence (AI) and a developed-market slowdown could hamper future growth. And as always, we believe thoughtful security selection demands an abiding focus on strong cash flows and best-in-class corporate governance.
Source: (1) Bloomberg, April 2024; (2) Bloomberg, April 10, 2024
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