Market corrections are an inevitable element of stock market investing. But when does a correction become a bear market? Darius McDermott, managing director of Chelsea Financial Services and FundCalibre, looks at India as a case in point.
With the exception of the tech behemoths driving the US market, Indian equities have arguably been the strongest growth story for investors in the past decade.
Having become prime minister in 2014, Narendra Modi’s policies have transformed India. They cover banking, manufacturing, inflation management and an increased focus on physical and digital infrastructure, all of which have boosted the long-term growth potential of the economy. To put this into context, India accounted for only 4% of the broader APAC equity market in 2014, but the share increased to 12% by 2024*, while the market cap of FTSE India Index has grown over six of the past 10 years*.
I’ve talked about the pros of this market in this column before – strong demographics, growth, few geopolitical concerns, strong corporate governance, and the growing online economy. The problem has been that it has become one of the worst-kept secrets in the investment world – meaning valuations have surged as a result.
But the past few months have seen India’s runaway growth story finally start to slow down. Since September, Indian equities are down by almost 10%**. The economy is projected to grow 6.4% in the 2024-25 fiscal year, but this is the slowest level of growth in four years, and markedly below the 8.2% figure recorded for the previous financial year***. The slowdown is due to numerous factors – including muted consumer demand and reduced government spending; there has also been a notable drop in foreign investment.
The big question is whether this is merely a lull or actually a structural decline. For me, it’s more likely to be the former and that is why Indian equities may offer an attractive entry point at these levels, although I must stress the market is by no means cheap on a historical basis.
The case for this being a transitory lull
There are a number of reasons to support the transitory view. Firstly, government spending is starting to pick up as the government cash balance — a major indicator for government spending — dropped to a deficit of INR458 billion (US$5.4 billion) in the first week of December. The figure has been on a downward trend, indicating the government is increasing spending on the likes of infrastructure and rural development. As a research note from Franklin Templeton points out, the activities should bolster capital expenditure (capex) growth in the private sector****.
Private consumption also remains strong in India. Consumer sentiment remains resilient and year-ahead optimism has held firm, indicating a post-election recovery
Goldman Sachs Indian equities manager Hiren Dasani believes we are in a mid-cycle correction, rather than a bear market, citing the lack of a big macro issue or corporate leverage problem impacting markets. He says the fiscal deficit, current account deficit and inflation are all trending in the right direction, while corporate leverage is at one of the lowest levels in the past 10 years.
He says: “Whether it is household leverage, mortgages, car loans and any secure loan products – the asset quality remains very good. There is no asset quality, credit quality or macro issue. So what is leading to the correction in the market? It is a soft patch economically where corporate earnings trade in line with nominal GDP at 10-11%, but we were in a phase of strong earnings in the region of 20% in the past four years. So the market is realising that we are in that stage of the earnings cycle where earnings growth is likely to fall back in line with nominal GDP – which has led to this pullback, which is healthy. It is an opportunity for those on the sidelines.^”
A research note from HSBC Global Private Bank concurs, citing double-digit earnings growth, superior return on equity relative to other Asian peers, robust economic fundamentals and easing of valuations after the recent pullback all being supportive for Indian equities, resulting in them going overweight the market^^.
Budget boost, tariff insulation and foreign investment
India’s budget announcement earlier this month furthered the transitory case with proposals to boost consumption. The headline move was raising the earnings threshold before income tax is due from INR 700,000 to 1,200,000 (equivalent to just under $14,000). The move brings the tax-free allowance in line with the UK, although the cost of living on these shores is five times greater^^^.
Moves were also made on capital expenditure and fiscal consolidation. The fiscal deficit for FY25 is expected to be 4.8% of GDP, which is lower than the previous budget estimate of 4.9%. The longer-term aim is in the region of 4.5%, nevertheless the move will be welcomed by international investors^^^. Foreign investment into Indian equities slowed markedly in 2024, although it should be noted that this was offset by increased domestic flows.
There are a couple of short-to-medium term points worth touching upon. The first is the impact of Trump 2.0 tariffs. Although India is a significant exporter of IT and pharmaceutical services to the US, the deficit with the world’s largest economy is relatively small ($44bn), giving the country a degree of insulation. Contrast that with the likes of China ($279bn) and the EU ($201bn)***.
Another boon for the Indian economy is the balanced industry weightings. The top four weighted industries are financials (25%), technology (14%), industrials (13%) and consumer discretionary (12%). Contrast that to the likes of Taiwan and Korea, where tech dominates with exposures of 76% and 42% respectively*.
Valuations are not cheap – but they are now reasonable
Forward P/Es on the Sensex currently stand at 20.2x, slightly below the 20.7x average over the past decade. Figures also show that from a market-cap perspective, mid and small-caps are still trading at premiums to average valuations over the past 20 years, while large-caps are slightly behind.
If you are a supporter of Indian equities in the long term, I’d argue this could be a good time to come off the sidelines and top-up exposure. Sometimes when a market has risen rapidly there can be an overreaction to negative news and this feels like exactly that. The long-term tailwinds are there and the Indian government has been proactive in tackling this slowdown.
Those looking to invest might consider the UTI India Dynamic Equity fund, a quality growth offering which invests across companies of all sizes in the region. If you want to tap into the smid-cap story, the Ashoka Indian Equity Investment Trust has been an excellent long-term performer which taps into the growing number of companies in the domestic market.
Meanwhile, those looking for an emerging markets/Asia portfolio with exposure to India might consider the FSSA Global Emerging Markets Focus or the Schroder Asian Alpha Plus fund.
*Source: LSEG, 22 January 2025
**Source: FE Analytics, total returns in pounds sterling for MSCI India, 6 February 2015 to 6 February 2025
***Source: abrdn, 29 January 2025
****Source: Franklin Templeton, 9 January 2025
^Source: CNBC, 5 February 2025
^^Source: HSBC Private Bank, 5 December 2024
^^^Source: Alquity, 3 February 2025
^^^^Source: Ashoka Indian Equity Investment Trust presentation, January 2025
^^^^^Source: UTI, January 2025
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
