A bronze bull statue stands outside the Bombay Stock Exchange (BSE) building in Mumbai, India, Monday, June 3, 2024. Indian stock futures soared after exit polls showed Prime Minister Narendra Modi’s ruling party won a landslide victory in the general election that ended on Saturday. Photo by Dheeraj Singh/Bloomberg via Getty Images
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This report is from CNBC’s this week’s “Inside India” newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big companies behind its rapid growth. Like it? Subscribe. here.
The Big Story
Until recently, India Nifty 50 The index is S&P 500 This year.
But since the big sell-off on August 5, US stocks have risen 8%, far outperforming Indian benchmark stocks.
While much of the strength in US stocks can be attributed to the market’s realisation that the US economy remains robust, the poor performance of Indian stocks is mainly due to a failure to provide a positive surprise to investors.
First-quarter profits for Nifty 50 companies have grown 3% over the past year. Excluding banks and energy companies, the rest of the companies barely managed to achieve 19% year-on-year earnings per share growth in the latest quarter.
But the stock market is forward-looking, and the above was expected. In fact, only 21 of the 50 companies that make up the index surprised investors. The rest simply couldn’t keep up.
Many analysts worry that the day is not far off when almost the entire market will fail to beat expectations, and even if a few companies do beat expectations, it will have little impact on total investor returns.
“The potential for better than expected performance from the auto, industrial, healthcare and IT sectors may not be enough to offset the potential for weaker performance from financials, metals and energy,” said Amish Shah, equity strategist at Bank of America. “Additionally, slowing global growth is a risk.”
The possibility of slowing global growth and falling commodity prices would be negative for India, but they are unlikely to derail India’s growth trajectory.
The South Asian country is a consumer-driven economy that is not yet dominated by exports, but the fall in oil prices due to the global economic slowdown could be a positive as lower fuel prices will help boost discretionary spending among citizens.
Since the stock market is not representative of the Indian economy (energy is a big part of the Nifty 50 but a relatively small share of GDP), a hit to oil and gas companies’ earnings will make investor returns volatile, while GDP growth may continue to remain flat.
Investors are also setting lofty expectations and raising the bar for future growth: According to Citi, earnings per share of Nifty 50 companies would need to grow at 13% annually for three years to meet expectations, a tall order but still low compared with even more lofty earlier expectations.
“While earnings revisions are better than the longer-term trend, they have slowed from the upward revision trend and are now flatlined since July,” said Surendra Goyal, head of India research at Citi. “We see limited upside at current levels and would see buyers on the dips.”
Should investors sell? Is it worth risking potential future gains?
One group of investors believes they could have solved that conundrum by turning to a more stable instrument: bonds.
“While Indian equities have enjoyed strong price appreciation and earnings growth, they are highly correlated with, and arguably dependent on, the continued performance of US equities in a late-cycle environment,” Maximillian MacMillan, senior investment director at British asset manager Abledon, told CNBC’s Inside India. “Fixed income offers diversification from this dominant and sole source of performance, but it does not provide an escape from risk.”
According to data from the Securities Depository Center of India, foreign inflows into Indian bonds have outpaced equities so far in 2024. Moreover, bond funds have also been recording net inflows continuously except for one month since the start of 2023.
Meanwhile, foreign investors have withdrawn funds from the stock market once every four months over the past two years.
“Foreign investor inflows into the equity market have been volatile but with Indian government bonds being listed in global bond indexes, India is attracting more foreign bond inflows,” said Shumita Deveshwar, chief India economist at TS Lombard.
The inclusion of Indian government bonds in JPMorgan’s emerging markets index has been one of the biggest drivers of inflows, along with a diversification of India-focused bond funds.
Actively managed funds, etc. AbdonNoto InvescoIndian bond funds from are offering yields well above 7%. ETFs from iShares, L&G and Xtrackers are also catering to the growing demand for Indian government bonds.
“These are one of the very few investment-grade asset classes offering yields of around 7%, creating a great entry point. [for] “Unlike many other global bond markets, the yields are higher than India’s policy rate of 6.5% and the latest inflation rate of 5.1%, making it particularly lucrative for investors,” said Kenneth Akintewe, head of Asia fixed income at Abrudo.
What you need to know
Concerns grow over Disney and Reliance’s $8.5 billion merger. Indian antitrust regulators say $8.5 billion Indian merger dependence Reuters reported that Disney and Reliance’s media assets are stifling competition due to their power over cricket rights. The merger between Disney and Reliance aims to create India’s largest entertainment company, with a combined 120 TV channels and two streaming services to compete with Sony, Zee Entertainment, Netflix and Amazon.
Asian countries react to WHO emergency declaration. Asian countries are closely monitoring Mpox, formerly known as monkeypox, after the World Health Organization declared the spread of the epidemic in Africa a global public health emergency. Chinese customs officials said they would step up surveillance at ports of entry, while India, Prime Minister Narendra Modi said, was continuously monitoring cases in the country.
A hospital in India came under attack as doctors went on strike in protest at violence. Doctors across India have refused to see any but emergency patients in protest of the brutal rape and murder of a doctor in the eastern city of Kolkata. More than one million doctors are expected to join the strike, paralyzing health services in the world’s most populous country. Last week, a 31-year-old medical intern was raped and murdered at the Kolkata Medical College where she worked, sparking nationwide protests.
What happened in the market?
Indian stocks rose in line with the rest of the world. Nifty 50 The index is up about 1% this week. The index is up 14% this year.
Benchmark yields on India’s 10-year government bonds fell to 6.85%.
Speaking on CNBC this week, UTI International CEO Pravin Jagwani said the Indian market would benefit from a strong monsoon season. “The Indian market tends to be cyclically synchronized with the monsoon,” he added.
Meanwhile, veteran emerging markets investor Mark Mobius said the unwinding of the yen carry trade will “definitely lead to a correction” in Indian stock markets, but he expects the bull market to resume soon after.
What’s happening next week?
Prefabricated building supplier Interarch Building Products and cloud services provider Orient Technologies are set to list on the stock market next week.
August 23: Inflation in Japan
August 28: Russian industrial production and unemployment rate
August 30: US Core Inflation
