The overall value of Indian stocks has soared more than 14 percent in the past three months as foreign investors bought into the world’s most populous country’s robust economic growth.
India’s stock market capitalization rose by $440 billion to more than $3.5 trillion, meaning India has reclaimed its position as the world’s fifth largest stock market after the US, China, Japan and Hong Kong, overtaking France and the UK.
The financial-weighted Sensex index, which tracks India’s 30 largest companies by market capitalization, has climbed steadily and hit a record high in the past three months 63,588 points On Wednesday, it was spurred by buying by foreign pension and insurance funds.
“Foreign institutional investors are acting as a catalyst in the current rally,” said Vijay Chandok, managing director at Mumbai-based ICICI Securities.
India’s stock market value surpassed that of France at the beginning of 2022, but suffered a sharp sell-off at the beginning of this year and once lagged behind the French and British markets.
Indian stocks now account for about 3.3 percent of global stock market capitalization, according to Bloomberg data.
Prime Minister Narendra Modi, who is on a state visit to the US this week, has been promoting India as an investment destination and an alternative manufacturing base for China.
Indian stocks rallied in January when ports-to-power company Adani Group was attacked by short sellers, wiping about $145 billion off the market value of its seven listed companies. Adani shares, which are not included in the Sensex index, have since rebounded but remain broadly below their pre-January levels.
India’s strong recovery from the coronavirus pandemic, which surpassed China this year to become the world’s most populous nation, contrasts with the performance of many Asian countries and growing investor concerns about the health of China’s economy.
IMF estimates India’s economic growth in 2023 will be 5.9%t, compared with 5.2% in China and 1.6% in the United States.
Some analysts have warned that companies risk being overpriced as stock prices rise faster than profits, sending price-to-earnings ratios soaring. For example, the India-listed unit of consumer goods group Nestlé trades at 68 times 12-month forward earnings, up from 51 times in 2019 and more than three times the ratio of its parent company.
Analysts at Mumbai-based brokerage Kotak Institutional Equities warned investors this week that “high valuations for most stocks in the consumer and investment sectors logically suggest an unfavorable return-risk balance”.
But some investors believe those lofty valuations are a price worth paying for growth that is lacking in other markets.
“Valuations may be stretched, but if India is the only economy that has expanded so significantly, they may stay that way for a long time,” said Alice Wang, portfolio manager for Asia ex-Japan at Quaero Capital in London.
Samiran Chakraborty, chief India economist at Citigroup, said most investors were “very surprised by the recent momentum in the economy” and “remain long India despite high valuations.” position”.
Billionaire tycoon Mukesh Ambani’s Reliance Industries – India’s largest company by market value – rose 10% in the quarter after losing ground at the start of the year.
Construction-related stocks also performed well as India embarked on a national infrastructure push. Mumbai-based paint group Asian Paints has gained 20 percent over the past month, while Tata Steel has risen 9 percent.
Indian equities saw net inflows of $9.4 billion from foreign portfolio investment in the second quarter, according to Bloomberg data. Analysts at Kotak Institutional Equities said “most” of the net inflows this year have been passive, meaning fund managers are buying the entire index rather than picking specific stocks.
Nilesh Shah, managing director of Kotak Mutual Fund, said that while corporate governance of Indian companies is improving, there are still risks in investing in the overall market as a “top-down” passive investor.
“There’s no doubt that there is a group of global investors who are just buying from the top down,” Shah said. But in the stock market, “there are good apples and bad apples . . . you can’t be top down in a country like India”.