India’s stock market soars, attracting investors at home and abroad

Until the pandemic, the Indian stock market was a different world that Dilip Kumar had never visited. But like so many other people around the world stuck at home, he started to see it as the place to be.

Mr Kumar, a proposal manager at an engineering firm in New Delhi, set up a free brokerage account through Zerodha, India’s largest online brokerage firm, and put some of his savings into Indian Railways, a clothing store and cinema chain.

“I invested in all the things I used every day,” he said. Since then, he’s gotten “great returns in a short amount of time” — more than doubling his money in just over a year.

Plenty of others want to get in on the action.

India’s booming stock market attracts both local novices and international investors to shares of the financial, industrial and technology companies that dominate its listings. The MSCI India index is up about 30 percent this year – almost twice the return of the global index – while India’s benchmark 30-stock S&P BSE Sensex is up about 25 percent. Both have hit a seemingly relentless series of record highs, rising on factors such as simple demographics, government and fiscal policies, and geopolitical changes.

The enthusiasm is apparent from the IPO this week for the parent company of the digital payment platform Paytm. The company has reached its goal of raising $2.5 billion, making the offering the largest in the country’s history and valued at more than $20 billion. The offering underlined the momentum of the financial and tech sectors in a country with a predominantly young population embracing digital start-ups.

At the same time, Prime Minister Narendra Modi’s government is trying to make India more self-reliant, a boon to domestic businesses that provide everyday goods and services, while trying to get more citizens — and their money — into the formal economy. And this spring, the Bank of India launched a bond-buying program, a smaller version of the kind that has sent stocks soaring around the world.

Combine those factors and it’s a recipe for a private investor explosion: new brokerage accounts have soared to an all-time high, according to the Securities and Exchange Board of India.

“There is pent-up demand among the upper middle class, which has rushed to the market,” said Jiban Mukhopadhyay, professor emeritus of business economics at the SP Jain Institute of Management and Research.

Their confidence has been bolstered by the massive stakes that institutional investors abroad are taking in companies that have gone public this year. The Abu Dhabi State Investment Fund, the Texas Teachers’ Pension Fund and the University of Cambridge have invested more than $1 billion in total in Paytm.

One reason: Foreign investors have soured lately in China, long the destination for those seeking high-flying returns, as growth slows there and a powerful central government cracks down on big tech companies.

“India really stands out this year as China slows down,” said Todd McClone, portfolio manager at William Blair’s Emerging Markets Growth Fund. His fund sharply cut its allocation to China and moved much of that money into Indian stocks, including conglomerate Reliance Industries, paint manufacturer Asian Paints and specialty chemicals company SRF.

“With the accelerating growth, lots of good companies and all the demographics behind it, I think it’s given people a lot of confidence to get back into that market,” he said.

It remains to be seen how sustainable the rally will be. Emerging markets like India are often at the mercy of the decisions of investors on the other side of the world. Oil prices are rising, which is especially challenging for India, a major importer.

Economists are also pointing to an uneven recovery from the pandemic that has driven many Indians back into poverty. The economy plunged 21 percent in India’s first lockdown, the small and medium-sized businesses that employ most of India’s workforce continue to falter and the government is spending billions of dollars to clear the growing number of bad loans from banks .

But investors remain optimistic: Wall Street analysts expect Indian companies to increase profits by more than 22 percent over the next 12 months — calculated in dollars — at a faster rate of growth than benchmark indices in China or the United States.

“Stock prices follow earnings and Indian companies have strongest fundamental momentum” said Brian Freiwald, an emerging markets portfolio manager at Putnam Investments in Boston.

Part of the reason for the rapid rise of the Indian market can be traced back to 2016 and a policy of demonetization. Intended to tackle money laundering, the policy banned the most widely distributed notes and destroyed the savings of families and small businesses overnight. But it also supported companies like Paytm, an industry that further benefited as the pandemic disrupted personal transactions.

The momentum is further enhanced by market-friendly measures by Indian policymakers. In February, Modi’s government proposed a budget calling for increased spending on health care and infrastructure. Two months later, the Reserve Bank of India began the same kind of quantitative easing programs that the Federal Reserve and other central banks had put in place to support their domestic economies. Although India started its bond-buying program more than a year after the Fed started, India had a similar reaction in the stock market: stocks rose.

For global investors, it was in stark contrast to what happened in China, which had quickly recovered from the pandemic shutdowns. Chinese policymakers began withdrawing some of their support for the economy early this year. Growth began to slow – down to just 4.9 percent in the third quarter – putting pressure on debt-laden companies that depend on continued rapid growth to pay their creditors. At the same time, under the increasingly centralized power of President Xi Jinping, the Chinese government has begun to rein in some of the country’s leading technology companies.

It has been an unappealing backdrop for investors, and China’s markets have posted some of the worst returns in the world this year.

“India usually does well when there’s a problem in China,” said Divya Mathur, emerging markets portfolio manager at money management firm Martin Currie in Edinburgh.

As fast as the Indian market’s gains have been, they remain vulnerable, experts say.

Emerging markets like India can be a whiplash as global investors who have deposited money can quickly pull it out, especially when central banks raise interest rates and raise investor capital. India was hit by such a situation in 2013, when the Federal Reserve began to move away from low-interest policy following the 2008 financial crisis, investors withdrew their money from India. Its currency, the rupee, plunged to new lows against the dollar, pushing the country to the brink of a financial crisis.

Fundamental demographic challenges also lie ahead. The young people who have helped accelerate the adoption of new technologies in the country will put pressure on the government to continue the rapid economic expansion. According to the World Bank, more than a quarter of India’s population – more than 360 million people – is under the age of 15.

“As this young population comes of age, can India provide adequate employment opportunities?” asked Ajay Krishnan, a portfolio manager specializing in emerging markets at Wasatch Global Investors in Salt Lake City.

The pandemic also remains a threat: About a quarter of India’s population is fully vaccinated, leaving it vulnerable to another wave in cases that could cause more economic damage and push more citizens into poverty.

Economics professor Mukhopadhyay said those dynamics are a sign that market returns are not an indicator of broader prosperity.

“The Indian stock market is behaving like a spoiled child,” he said. “It has hardly any relation to the movement of the economy.”

Sameer Yasir reporting contributed.