As India sets its sights on achieving the status of a developed nation, “Viksit Bharat,” by 2047, one might wonder about the future of the Indian stock market. What could the market look like, and how large might the total equity market be? This question invites us to imagine the possibilities as India progresses towards its ambitious goals.
Sensex has grown at a CAGR of 12.1% in the last 25 years, from 4,680 to 80,665, as of 15th July 2024. India’s economic outlook appears promising, suggesting that the nation will become wealthier over the next 25 years. Key factors for achieving this growth include the continuation of progressive policies, political stability, and minimal geopolitical tensions. If the Sensex continues to grow at the same rate over the next 25 years, the indices could reach 13,87,314, an investment of Rs 1 lakh potentially growing to Rs 17.2 lakh.
It may seem astonishing and overly simplistic, but this is the power of capitalization and the compounding effect. A growth trajectory which the world has perceived in other nations like the US and China. The factors for the stock market to flourish are to have a rightward social and industry fundamental, a pro-trade policy, and a large market to do business in. These factors promote a robust corporate culture, enhance competition, and strengthen industries, ultimately driving earnings growth and leading to healthy valuations.
Currently, India’s economic growth, fiscal position, and geopolitical landscape are favourably aligned, supporting a positive long-term growth trajectory. In the short term, however, the market will have to address challenges such as high valuations, temporary slowdown in earnings, inflation, interest costs, and the potential impact of the upcoming US election.
The Indian stock market is in a sweet spot
The domestic market is on solid footing, with the recent surge beginning with the formation of a stable coalition government, instilling continuity of policy. FIIs have returned, and market volatility has significantly reduced. The India VIX index, which peaked at 26.75 on June 4th, has halved. The rally is also underpinned by the growing sense of optimism that pro-growth policies and welfare measures will boost the economy in the medium-term. Globally, sentiment has improved due to the increased likelihood of rate cuts in the coming quarters.
The inclusion of Indian bonds in the JP Morgan EM bond index is a significant development for the Indian economy, with profound long-term implications that highlight its strength. This is expected to bolster the local currency, ease inflation (reduction in cost of import), cut interest rates, reduce country risk, and improve country valuation in the long-term. India is currently in a favourable position, with no apparent negative factors impeding its progress. Notably, India has started to outperform the rest of the world, a trend that was absent YTD. Broad indices like the Nifty 500 index have delivered a return of 19.5%, as of 15 July 2024.
The short-term issue
A notable concern is the high valuation led by the recent rally, while the earnings growth forecast is feared to slowdown in FY25 and FY26. Q1 results are on slow mode. However, the subdued earnings are contrary to the upgrade in GDP growth forecast, as indicated by the RBI in its June policy and other international institutions. This reduces the probability of weak earnings forecast for successive quarters and perhaps a plausible upgrade in earnings in H2FY25.
However, due to the high valuation and muted earnings outlook, there is a risk of underperformance in the short to medium-term. Other risks are a below expected budget outcome and the US presidential election in November. In July, there have been signs of moderation in overall market momentum, particularly among mid and small-cap stocks, which are consolidating due to historically high premium valuations. This underperformance is expected to persist in the short term.
India is trading at a premium to the other EMs and developed nations by 98% and 28%, respectively. MSCI India trades at a one year forward P/E of 23.8x, above the long-term average by 24%. Recent performance has been robust, with MSCI India posting an 18% gain over the past six months. Given India’s current high valuations, the potential for upward momentum is limited in the short to medium term.
How investors can navigate near-term uncertainty
Sectors poised to be investable are ones holding a strong future growth outlook, like manufacturing, electronics, IT, renewables, healthcare, e-commerce, infrastructure, agriculture, and consumption. However, some of the pockets are expensive. Therefore, it is important to focus on the fundamentals of the stocks, avoid those that are overly valued, and adopt an accumulation strategy.
It is prudent to focus on specific stocks and sectors. To ensure safety and achieve above-market returns, it is advisable to rotate out of the outperformers of the past 2-3 years and churn to value sectors. As the rule of average will improve in the coming years. The improvements in rural areas, agriculture, and government expenditure are anticipated to benefit sectors connected to the domestic economy, such as staples, FMCG, fertilizers, telecom, cement, pharma, infra, and consumer services. Consequently, transiting from growth to value stocks over the medium-term is the way forward.
Indian stock market’s big picture
India’s stock market’s total value (market capitalization) stands at Rs ~450 trillion (5.5 trillion USD), which has been growing at a CAGR of 15% since 2010. Currently, the country valuation, i.e. Market cap to GDP ratio is, 150% based on FY24 nominal GDP. And approximately at 138% based on the projected nominal GDP of FY25, forecast at Rs 328 trillion. Historically, India’s real GDP has grown at 6% CAGR for the last 10 years. And it is projected to grow at 7% annually this decade, and then at an average rate of 5-6% between 2030 and 2047.
Real GDP is adjusted for inflation, whereas nominal GDP represents the total value of all products generated in a year, valued at current market prices. Over the past decade, India’s nominal GDP has grown at a rate of 10% annually and is projected to maintain this growth rate until 2030. Beyond that, it is forecasted to average a midrate of 7 to 8% annually until 2047.
The long-term economic risk of the Indian economy is that 2/3rd of the population resides in rural areas, where the income gap between urban and rural regions is widening. Although India’s per capita income is improving, it remains significantly lower than that of other EMs, such as 1/5th of China. It is a big task to upgrade the level of total income and standard of living, requiring a large amount of government, private, and foreign expenditure. India is a large developing economy that must carry the merits and demerits of a democratic system. In today’s complex world, the biggest risks are high inflation, geopolitical risks, and maintenance of government stability. Otherwise, progress will be slow, and the time needed to achieve goals will get extended.
India is currently laying a robust foundation for industrialization with implementation of new reforms, guaranteed packages and ease in doing business. India has started to experience better than average corporate growth in the last 2-3 years. And this is expected to grow in the years ahead in anticipation of new reforms and encouraging measures for manufacturing, along with an increase in private and government spending.
Sensex has been generating a nominal return of 12.3% in the last 10 years, which can be expected to continue. Viksit Bharat, forecasts India’s nominal GDP to grow to USD 34.7 trillion in 2047 from USD 4 trillion in 2024. The current US GDP is forecast at $28.9 trillion in 2024. If India maintains the current valuation of 138% of GDP, the country’s total market capitalisation will increase ninefold to 48 trillion from 5.5 trillion dollars today, a CAGR of 10%. At the same time, benchmark indices are likely to experience a better multiplier effect, given best quality and earnings growth outlook.
