The India story is a global reality now, and it is no longer just about soft power. Having hit the $4-trillion GDP mark, India has risen – and is expected to rise further – in a world marred by chaos, still reeling from the after effect of the pandemic. India is the fifth largest economy in the world and will become the third largest, overtaking Germany and Japan, by 2030. India’s GDP is expected to almost double from today and rise to $7.5 trillion by 2030, which will also make it the second largest economy in Asia.
Nitin Kapur is Co-Founder and Director, Wealthyfy (MS Finline Pvt Ltd), Business Associate of IIFL Securities. In 2002 he joined IIFL in Research Department. With a PGDBM in Finance and NCFM Certified in Capital and Derivatives Market, he has 21 years of rich experience in Financial Services
Nifty is set to follow the same trajectory and expected to rise to 22,500, a gain of 14%, by as early as December 2024. Strong economic growth would be a major trigger for this gain.
On the one hand, the world is starved of growth and, on the other hand, India is rising up in tumultuous times. The country registered a GDP growth rate of 5.5% in the last decade. The expected GDP growth for FY2024 is 6.5%. Apart from fast GDP growth, there are other key factors. These include the robust capex plans of the government as well as of corporates; strong credit growth of the banking industry as well as a favourable NPA cycle; and a robust and continued inflow of retail investors. Throughout this year, steady mutual fund flows ensured stable markets even during the months of high FPI selling. Total mutual fund AUM has grown to nearly six times over the past decade. Currently, mutual fund AUM is approximately Rs 48 lakh crore. There is a monthly MF SIP inflow of around Rs 16,000 crore, which was just close to Rs 5,000 crore five years back.
Though the share of equity assets in Indian household assets has more than doubled over the past decade, equity still forms just about 5% of Indian household assets. Indians have, however, been under-invested in equities historically. But there is hope here too. As the per-capita income of a rising middle-class population crosses the subsistence level, there is a reasonable chance of higher retail participation in equities.
Apart from the domestic flows, there is an expected increase in foreign flows as leaving China far behind India is at a sweet spot. Currently, India’s weightage in the MSCI Index is about 1.6% and can increase to 2.5-3% soon, going by the strong economic indicators. Another positive news is the inclusion of Indian bonds in JP Morgan’s emerging market bond index; it will bring more foreign inflows. However, as any good pilot would tell you, it’s not just take-off or touchdown when you need attention, but also when you are soaring high with no visible issues.
Despite the fact that Nifty is currently trading close to the 20,000 mark, it has given just 5% CAGR in the last two years. Nifty EPS is currently Rs 940, trading at P/E of 21. It is expected to grow by nearly 12% to Rs 1,060, hence Nifty at 22,500 will be fairly valued. If you look at the valuation, Nifty is still cheaper than the 5-year and 10-year P/E average of 24 and 23 respectively.
There is a need to keep a lookout for periodic factors too, including the world’s largest election due in 2024. A historical analysis of the past five elections in 1999, 2004, 2009, 2014 and 2019 suggests that the index moved higher in the six months leading to the election on all five occasions, with an average return of 16%. Yes, in the event of a coalition government formation, the market could decline by 5-10%.
There is also a need to be cautious of global risks, both geopolitical and economic. The recent Israel-Palestine tensions, coming soon after the Russia-Ukraine crisis, gave some jitters to the index. Moody’s has recently given a negative outlook to the US economy on account of high debt, high fiscal deficit and government interference. Higher US treasury rates are an area of concern.
Overall, there is no denying that India is at a sweet spot. It is a large economy with a savings rate of about 25%, and a bigger chunk can come to equities. Yes, don’t expect linear returns as volatility is a part of equity investing. Look at it with perspective, though. When you invest in FD or fixed income instruments, you wait for 3-5 years for a mere 7-8% return. Equity investing is a game of patience. MF SIPs have shown that equity is a great place for decent returns.
Stay disciplined, stay focused; cruise with confidence and caution. That’s a good mantra for investing, or even for life itself.
