The bustling Nasdaq stock market is often considered a hotbed for investment worldwide, but India stands out as an exception.
According to a report by The Wall Street Journal on June 19th, India is benefiting from strong profit growth, geopolitical stability, and a favorable demographic structure, providing a compelling investment environment. From the end of 2019 to this past Tuesday (June 18th), the MSCI India Index has surged by 110%, surpassing the 99% increase of the US tech stock index. In comparison to the current situation in the Chinese stock market, India’s performance has been outstanding, with the MSCI China Index falling by 30% during the same period.
The divergent fates of these two Asian markets reflect their economic realities. China continues to be burdened by a collapsing real estate market that hampers its economy, while the peculiar regulatory measures by the Chinese Communist Party have led to challenges for previously rapidly growing tech companies in China. For instance, the Chinese e-commerce giant Alibaba has seen its market value shrink by about three-quarters since reaching its peak in 2020.
On the other hand, the Indian stock market is riding on the wave of a robust economic momentum. In the first quarter of this year, India’s economy grew by 7.8% annually, making it the fastest-growing major economy in the world. This, naturally, has resulted in more lucrative profits for businesses. According to data from Morgan Stanley, the net profits of listed Indian companies grew by 17% in the quarter ending in March. Developed countries pushing for supply chain diversification away from sole reliance on mainland China have sparked an investment frenzy in the Indian manufacturing sector. India’s young population – with an average age of 28.6 years compared to China’s 39.5 years – also adds to India’s attractiveness as an investment destination.
Differences in economic growth rates only partially explain the variance in stock performance. Higher price-earnings ratios (PE ratios) are also propelling the stock market upward, and PE ratios can easily exceed or fall below expectations. Based on data from FactSet, the expected PE ratio for the iShares MSCI India Exchange-Traded Fund stands at 23 times, higher than the 19 times recorded at the beginning of 2020. For similar funds invested in Chinese stocks, the PE ratio has dropped from 12 times to below 10 times.
Another major stock market showing similar stellar performance to India is the US stock market, led by companies like Nvidia. In contrast, the Chinese stock market ranks near the bottom of the global stock market rankings. Goldman Sachs notes that Indian stocks trade at a premium of around 60% compared to other markets in the Asia-Pacific region (excluding Japan), whereas the average over the past five years was 50%.
After foreign investments into the Indian stock market reached a high of $21 billion in 2023, foreign investors have mostly been net sellers of Indian stocks this year, particularly after the conclusion of the Indian general elections in May. On June 4th, the MSCI India Index saw a 6% decline, as earlier opinion polls suggested that Indian Prime Minister Narendra Modi might not secure the parliamentary majority seats hoped for by the market. Modi is known for his economic reform policies and is a favorite among Western investors. However, following a successful re-election of Modi’s party with its allies, the market rebounded and foreign investors have slowly started to re-enter the market over the past week.
India is increasingly becoming a market that global investors cannot afford to overlook. During a recent stock market weight rebalancing process at the end of last month, MSCI increased the weight of India in its Emerging Market Index while reducing the weight of China. Data from Northern Trust Corporation shows that India now represents approximately 18% of the index, up from 8% in 2020, whereas China’s weight has decreased from 40% to 27%.