Indian actor Shah Rukh Khan at the Bombay Stock Exchange in Mumbai ·Hindustan Times via Getty Images
The volatility India's stock market saw ahead of its elections in June showed just how notoriously bad financial markets are at assessing and pricing political risk accurately. But as shares in Mumbai and Delhi push higher under a Modi 3.0 era, is it time for you to invest in the world's fifth-largest economy?
You wouldn’t be alone. Last year alone, overseas investors bought $21.7bn (£16.5bn) worth of Indian stocks, accounting for 55% of foreign purchases of equities in Asia, excluding Japan, according to data from HSBC (HSBA.L).
The benchmark BSE Sensex Index (^BSESN) is up 11% so far this year and the Nifty 50 (^NSEI) has pushed 12% higher in the past 10 months.
India is already the world’s most expensive major equity market, with a forward price-to-earnings ratio that is even higher than the technology-heavy US market.
“At the simplest level, India is both a low-cost manufacturing location and a rapidly developing source of demand. Perhaps, more significantly, India is also home to true centres of innovation in a number of fields,” said analysts at investment bank Bernstein.
However, whether its stock market will continue to outperform is a question on investors’ minds.
Goldman Sachs (GS) has recently shifted its position on Indian equities, downgrading them to neutral from overweight. The investment bank quoted a deceleration in economic growth as a key factor in this decision.
However, UBS (UBS) Global Wealth Management is urging investors to “buy the dip,” viewing the current slowdown in growth and earnings as a temporary setback, according to Bloomberg.
This difference in analyst sentiment showcases a lingering uncertainty regarding India’s market resilience, especially in light of weakening consumer spending and high valuations. While some traders anticipate a more gradual ascent for Indian stocks, others are concerned that the renewed focus on China's economic recovery could draw global investment away from India.
Goldman Sachs strategists said that although the long-term outlook for India remains positive, recent data indicates a cyclical slowdown across various sectors. They cautioned that deteriorating earnings sentiment and elevated valuations may restrict short-term gains. The firm has revised its 12-month target for the NSE Nifty 50 Index from 27,500 to 27,000, suggesting a potential upside of 10% from recent levels.
This cautious stance adds to a growing chorus of brokerages questioning the sustainability of India’s stock market rally. Bernstein Société Générale (GLE.PA) recently downgraded local equities to underweight, citing anticipated capital outflows and lackluster profit expectations, while projecting better prospects for Chinese equities following supportive government policies.
On the other hand, investors bullish on the Indian market argue that current slowdowns are a result of transient factors and that economic growth will likely rebound. Tan Min Lan, head of UBS’s Asia Pacific chief investment office, said that India remains the fastest-growing economy in the G-20, advocating for increased foundational investment in the market. She added that institutional asset allocation in India is still “minuscule,” suggesting significant potential for growth in investor holdings.
This bullish perspective echoes sentiments expressed by Christopher Wood, Jefferies Financial Group’s global head of equity strategy, who maintains that India is poised to be the most attractive stock market over the next decade, largely due to its robust earnings outlook.
Booming IPO scene
Bhavish Aggarwal, CEO of Ola Cabs, and founder of Ola Electric, poses with Ola electric scooters ·REUTERS / Reuters
For years, India's capital markets struggled to gain traction. Today, however, the country has transformed into the heart of IPO activity in Asia, with a wave of significant stock listings anticipated in late 2024 and 2025.
Since January, companies in Mumbai completed 189 new share listings, generating $5.8bn. Only the US has raised more fresh capital through onshore IPOs.
The crown jewel appears to be Ola Electric (OLAELEC.BO), after emerging as one of India’s most successful large IPOs. Its shares have surged 80% from the offer price, giving the company a market value of more than $7bn.
The Indian e-scooter maker has become the biggest player in a country where adoption of clean vehicles is still low. "Tesla is for the West and Ola for the rest," Ola's chairman Bhavish Aggarwal has said.
But the IPO fever doesn’t stop there, with SoftBank-backed Indian food delivery giant Swiggy aiming for a valuation of approximately $15bn in its forthcoming stock market debut, with plans to raise between $1bn and $1.2bn, according to Reuters.
If successful, the offering would rank among the largest Indian IPOs this year.
Swiggy, a leading player in India's online food delivery market, competes closely with Zomato (ZOMATO.BO) and has heavily invested in the emerging quick commerce sector, where groceries and other products are delivered in under 10 minutes.
In April, Swiggy secured shareholder approval for an IPO that could raise up to $1.25bn. While Swiggy is targeting a valuation of around $15bn, the final figure may vary, the sources noted.
SEBI: India’s regulator caught in the eye of a storm
People have taken to the streets to protest against SEBI chief Madhabi Puri Buch and demand for a probe into the Adani group ·Reuters / Reuters
India’s stock market is booming but its regulator has been embroiled in controversy, which could spark investor jitters.
US short-seller Hindenburg Research has alleged that the Securities and Exchange Board of India (SEBI) chairperson Madhabi Puri Buch and her husband had undisclosed investments in an offshore fund structure used by Vinod Adani, brother of Adani Group founder Gautam Adani.
The report suggested that SEBI’s lack of action against the Adani Group, despite evidence of fraudulent practices, could be due to Buch’s involvement in these funds.
“Madhabi Buch and her husband had stakes in a multi-layered offshore fund structure with minuscule assets, traversing known high-risk jurisdictions, overseen by a company with reported ties to the Wirecard scandal, in the same entity run by an Adani director and significantly used by Vinod Adani in the alleged Adani cash siphoning scandal,” the report added, according to local media.
Hindenburg Research has called for further investigation into these allegations. The firm has pledged to donate any proceeds derived from the report to causes that support free expression.
SEBI has yet to make public findings from several long-running probes into the Adani Group after India’s Supreme Court in January ordered it to wind up the investigations within three months.
The market regulator said in a statement that it had "duly investigated" Hindenburg's allegations against the Adani Group.
It also said that its chairperson had made the required disclosures in "terms of holdings of securities and their transfers", and that she had recused herself in matters involving "potential conflicts of interest".
However, that has not been enough to clear the suspicions, with Rahul Gandhi, the leader of opposition in India's parliament, saying that the allegations have "gravely compromised" the "integrity" of SEBI, "which is entrusted with safeguarding the wealth of small retail investors", the BBC reported.
Tata Group: neutrality amid volatility
Natarajan Chandrasekaran, chairman of Tata Sons. ·INDRANIL MUKHERJEE via Getty Images
Tata Group, one of India's largest conglomerates and a key player in the country’s growth story, has seen its shares climb in the election aftermath, with companies like Tata Motors (TATAMOTORS.NS), Tata Motors DVR (TATAMTRDVR.NS) and Tata Chemicals (TATACHEM.NS) all pushing higher.
Founded in 1868 by Jamsetji Tata, the Tata Group has a significant presence in numerous industries, including steel, automotive, IT, telecommunications and consumer goods.
Under the leadership of successive generations, the group expanded its footprint across multiple sectors.
The group is mourning the loss of industrialist Ratan Tata, who died aged 86 on the 10 of October. Hailed as a "titan", he transformed the Tata Group into a sprawling international enterprise, with a portfolio ranging from software to sports cars.
Tata established Tata Motors, which later launched India's first car, the Tata Indica. Under Ratan Tata, who led the group from 1991 to 2012, the group made acquisitions like Tetley by Tata Tea, Corus by Tata Steel, and Jaguar Land Rover by Tata Motors, transforming Tata into an international conglomerate. The group currently employs over 935,000 in more than 100 countries across six continents.
Headquartered in India, it is comprised of 30 companies across ten verticals.
Major companies owned by Tata Group include:
Tata Steel (TATASTEEL.NS): One of the world's largest steel manufacturers.
Tata Motors (TATAMOTORS.NS): A leading automotive manufacturer, known for passenger cars, trucks and defence vehicles.
Tata Consultancy Services (TCS.NS): A global leader in IT services, consulting and business solutions.
Tata Power (TATAPOWER.NS): India’s largest integrated power company.
Tata Chemicals (TATACHEM.BO): A specialist in chemicals, crop protection and consumer products.
Tata Consumer Products (TATACONSUM.BO): Includes brands like Tata Tea and Tata Salt.
Titan Company (TITAN.BO): Known for watches, jewellery (Tanishq) and eyewear.
Taj Hotels (TAJGVK.NS): A chain of luxury hotels and resorts.
Tata Technologies (TATATECH.NS): The newest of Tata companies to go public, operates as a product engineering and digital services company with operations in North America, Europe and Asia Pacific.
Tata Investment Corp (TATAINVEST.NS): A non-banking financial company, primarily involved in investing in long-term investments, such as equity shares and equity-related securities.
The Tata Group is known for its political neutrality stance and commitment to social responsibility, with 60% of its shares held by philanthropic trusts. These trusts support various initiatives in education, healthcare and rural development, following the group's ethos of contributing to the nation's growth beyond business.
Analysts see Tata Group as a good bet for those looking for diversified exposure to various industries with a reputable and well-established conglomerate.
Tata has a reputation for ethical business practices and strong corporate governance, which can be reassuring for investors. However, the performance of several Tata companies is tied to economic conditions in India and there is still uncertainty over how Modi will deliver his third mandate.
Tata pioneers chipmaking in India
In February, Tata Electronics announced it was entering the semiconductor sector and chipmaking after its proposal to build a mega semiconductor fabrication facility in Dholera, Gujarat – Modi's home state – was approved by the government of India. It will build the 'AI-enabled' Fab in partnership with Taiwan’s Powerchip Semiconductor Manufacturing Corporation (6770.TW) and the construction will begin this year with a total investment of $11bn.
N Chandrasekaran, chairman of Tata Sons, said at the time: “Tata Group has a tradition of pioneering many sectors in the country and we are confident that our entry in semiconductor fabrication will add to this legacy."
The Tata Fab will have a manufacturing capacity of up to 50,000 wafers per month. It will make chips for applications such as power management IC, display drivers, microcontrollers (MCU) and high-performance computing logic, addressing the growing demand in markets such as automotive, computing and data storage, wireless communication and artificial intelligence.
Top stocks to watch in India
Models strut the runway at a fasion show at the Taj Palace hotel in New Delhi which is owned by the Indian Hotels Company, part of the Tata Group. ·Rubina A. Khan via Getty Images
Shares of defence, infrastructure, railway and capital goods companies are getting a boost, the head of brokerage Motilal Oswal Financial Services said.
"These were areas where the government has focused on and invested money. High probability that the ruling government will continue. If they return... they'll go [with] much more vigour," Raamdeo Agrawal, chairman and co-founder of the brokerage, told Reuters.
Meanwhile, Motilal Oswal suggests that investors should focus on specific sectors and companies when considering their investments. They recommend looking at financial companies, consumer goods companies, industrial companies and real estate companies. Below are their top investment picks divided into large caps and midcaps:
These companies are considered attractive investment opportunities by Motilal Oswal due to their strong market positions and potential for growth.
Brokerage firm PhillipCapital has identified 12 stock picks with strong one-year growth potential for investors aiming to position their portfolios strategically ahead of the election results. These stock picks span various sectors, offering a diversified approach to potential investment opportunities. The selected stocks are:
These companies are seen as having robust growth prospects in the upcoming year, making them attractive options for investors looking to optimise their portfolios.
Broker 5paisa has listed the top sectors set to benefit from Modi’s third term:
Infrastructure
Power and Renewable Energy
Banking and Financials
Tourism & Hospitality
Healthcare
Defence
Railways
Oil and gas
PSU Banks
Startups
Ethanol
However, investing in individual shares in India takes some serious legwork if you are an outsider.
Investing as a foreigner or NRI in India
India’s stock market capitalisation topped $4.3tn to overtake Hong Kong as the world’s fourth-largest market. ·Hindustan Times via Getty Images
To invest in shares of India’s listed companies, foreign investors have to use the foreign portfolio investment (FPI) route. Investors, whether individuals or firms, need to be registered with the country’s markets regulator and abide by its disclosure requirements. Most of the 10,800 FPIs are funds.
Non-resident Indians (NRI) can invest in the Indian stock market through the portfolio investment scheme and transactions are routed through a non-resident ordinary (NRO) savings account. The overall investment limit for NRIs and any person of Indian origin (PIO) in stocks is 10% of the company’s paid-up capital. Individual investment is capped at 5%.
NRIs cannot engage in intra-day trading, they have to take delivery of shares and can’t trade derivatives.
Investment options for UK Investors
For UK investors, funds and investment trusts might be the most sensible option to capitalise on the Indian stock market, which has overtaken Hong Kong as the fourth largest in the world.
These provide diversified exposure to Indian markets and are managed by professional fund managers. Some popular options include:
JPMorgan Indian Investment Trust (JII.L): This trust aims to provide long-term capital growth by investing in a diversified portfolio of Indian equities.
Aberdeen New India Investment Trust (ANII.L): Focuses on long-term capital growth through investments in Indian companies, leveraging Aberdeen’s expertise in Asian markets.
Franklin India Fund (0P0000W9XO.L): A mutual fund that invests in a broad range of Indian equities across various sectors.
iShares MSCI India ETF (INDA): An exchange-traded fund that tracks the performance of the MSCI India Index, providing broad exposure to Indian large- and mid-cap companies.
Jupiter India Fund (0P0001JKIB.L) - A diverse fund with 82 holdings spread across the financial services, healthcare, consumer, energy and industrial sectors.
By choosing these investment vehicles, UK investors can participate in India's growth while mitigating some of the complexities and risks associated with direct investments in foreign stocks.
Indian politics and the stock market
India's prime minister Narendra Modi, right, and his bête noire Rahul Gandhi, India's opposition leader. ·DREW ANGERER via Getty Images
Prime minister Narendra Modi’s inability to secure a landslide victory in India's general election on 1 June knocked the country's stock market, which had reached an all-time high prior to the results. However, share prices have since rebounded as investors perceive potential benefits in the electorate's decision to limit the Bharatiya Janata Party (BJP) leader's dominance during his third term in office.
For the first time in a decade, Modi's BJP failed to achieve a parliamentary majority on its own. The BJP won 240 seats, which, while short of a majority, still enabled the National Democratic Alliance (NDA) — the coalition led by the BJP — to secure 293 seats in total, surpassing the 272 seats required to form a government.
In his two terms, Modi focused on improving India's infrastructure and boosting domestic manufacturing, including in the defence sector. However, he also peddled a nationalist Hindu-first policy, severely undermining India's secular ethos, freedoms and fundamental rights enshrined in India's constitution.
Shares of top defence, infrastructure and capital goods companies have risen between 64% and 480% over the past 12 months until June.
“Investors had been betting on a clear win for incumbent prime minister Modi and a continuation of his investment-led agenda, driving Indian shares up ahead of polling day. The closer-than-expected result has triggered a whipsaw reaction in Indian markets as those plans were thrown into uncertainty,” Ed Monk, associate director at Fidelity International, said.
Investors have been mostly favourable towards Modi’s economic agenda throughout his decade-long tenure.
The primary catalyst for the surge in India’s stock market in recent years has been strong earnings growth. Last year, corporate profits increased by 20%, in line with the rise in the Nifty 50 index. In the first quarter of 2024, profits were 16% higher compared to the same period the previous year, according to Goldman Sachs.
The bank forecasts a 15% growth in profits for both this year and the next. This earnings growth is expected to support the market even at its currently high valuation multiples.
“[The] election results have been a stark reminder of the unpredictability of polls and market reactions. In India, exit polls at the weekend suggested Modi was on course to increase his majority, driving markets higher. However, the result was the opposite, with a coalition government now on the cards, prompting a steep drop in the Sensex,” Lindsay James, investment strategist at Quilter Investors, said.
“High valuations may mean that polling errors of this magnitude are taken as more of a bad surprise than a good one, but a coalition may temper the political extremes and provide economic stability – ultimately no bad thing,” she added.
As investors anticipate new policies and reforms, several sectors are positioned for potential growth.
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