The beginning of the year 2023 becomes India. The country’s fast-growing economy and fast-growing equity market have convinced money managers from Morgan Stanley Investment Management for State Street Global Advisors to call it a top investment destination.
Then came the $50 billion sale of billionaire Gautam Adani’s corporate empire.
The shock forced Wall Street to reassess its faith in India’s expansion and pro-business government, which helped the Sensex index trade in the last quarter at its highest in a decade against the S&P 500. New York scathing report short-seller hit Adani Group – highlights contradictions on India’s runway for growth.
“India needs to show strong institutions,” said Rajeev De Mello, global macro portfolio manager at GAMA Asset Management, which owns country equities as part of its overweight emerging markets position. “Government issues are a concern for all markets. But when valuations are higher than other countries, maintaining the integrity of financial markets is important.
Investors are increasingly attracted by the narrative of opportunities in Indian assets. While bonds have slowly entered the global benchmark index, many companies have rushed to sell shares, adding to the size of the country’s emerging stock market.
Indian stocks now account for more than 14% of MSCI’s emerging market equity index, trailing only China, after outpacing Taiwan and South Korea last year. Morgan Stanley predicts India’s equity market is set to become the third largest in the world before the end of the decade.
Read more: Morgan Stanley IM Says Decade of Emerging Markets Has Begun
But it is that optimism that has led shares in the Sensex index to trade at about 21 times forecast earnings, a metric that shows investors are willing to pay a premium on the prospect of strong growth. Amid high valuations, the Sensex index headed for its second straight monthly loss despite the emerging equity rally.
Adani counter
A 100-page report by short seller Hindenburg Research last week containing allegations of stock manipulation and accounting fraud by Adani entities added more fuel to the sell-off.
Hindenburg released the report just days before the billionaire’s flagship company Adani Enterprises Ltd. launched India’s largest initial public offering seeking to raise 200 billion rupees ($2.5 billion).
In a 413-page rebuttal published on Sunday, the Adani Group said Hindenburg’s conduct was “no calculated securities fraud,” and alleged that the research firm attacked India as a whole.
Read more: Adani says Hindenburg action was ‘Calculated Securities Fraud’
For some, including Hasnain Malik, a strategist at Tellimer in Dubai, “bad behavior by one company, if it can happen in this case, usually does not destroy confidence in the entire equity market.”
Even so, the collapse of one of India’s largest businesses could set the country back as it competes with China as an investment magnet.
A cheaper alternative
Indian stocks will be vulnerable to portfolio changes as investors reduce exposure to expensive assets and instead choose China’s economy to reopen to beneficiaries, such as Taiwan and South Korea, said Jon Harrison, managing director of emerging market macro strategy at TS Lombard in London. . .
Carrhae Capital LLP, whose emerging market hedge fund beat peers last year, also favors China’s reopening. The manager will only find a bargain in the Indian story of “structural growth” if “investors rush out of India to chase the story of China,” said Ali Akay, the firm’s London-based chief investment officer.
“I personally don’t think the structural story in India has changed much,” said Akay. “The growing perception of China as a strategic competitor rather than a partner, makes it possible for India to assume the mantle of regional bulwark against China that it needs to build and integrate with the West.”
In an environment of heightened geopolitical risk – with increased competition between the US and China and Beijing’s increasing pressure on Taiwan – India offers a degree of “safety,” said Gaurav Mallik, chief investment strategist at State Street Global Advisors. The money manager has an overweight position in India, drawn to the middle class many who “bodes well to play consumption,” he said.
Mark Mobius, who spent more than three decades at Franklin Templeton Investments, plans to put more money into India, which may have overtaken China as the world’s most populous country. A young and growing workforce can increase productivity if investment in education and infrastructure can continue.
“The long-term future of the market is very good,” said the co-founder of Mobius Capital Partners LLP, which sees India as one of its top allocations.
Learn how to navigate and strengthen trust in your business with The Trust Factor, a weekly newsletter that examines what leaders need to succeed. Log in here.