India’s stock market has rallied to all-time highs that could continue

India’s strong growth prospects and recent stock market boom has piqued investor interest, drawing attention and increasing exposure to a once ignored market.

“India’s growth story is greater than the average … Whatever the world is grappling with, it’s business as usual for India,” said Feroze Azeez, deputy CEO of Anand Rathi Wealth.

Major economies were hit by higher inflation during the Covid-19 pandemic, but India’s inflation was already elevated. The country’s inflation rate stood at 7.59% in January 2020, while that of other large economies like the United Kingdom and Japan were low, at 1.8% and 0.8% respectively in the same month.

Azeez said high inflation is a situation that India is used to and it has “always traveled the path of higher inflation and higher interest rates.”

In June, India’s inflation rate was 4.81%, which remains within the Reserve Bank of India’s tolerance band of 2% to 6%. The central bank has left interest rates unchanged at 6.5% since April.

“All the macro variables are stacking and we are in the growth cycle … There is a paradigm shift and flight of capital from Indian households savings to equity to contribute to the India growth story,” Azeez told CNBC’s “Squawk Box Asia” last week.

The International Monetary Fund recently raised its 2023 growth forecast for India, citing stronger growth in the fourth-quarter last year, powered by domestic investment.

Both the Sensex and Nifty hit all-time highs in July and analysts are confident the indexes will bring positive returns for years to come.

“Many people have said in the past that India is the place to invest in, but they have been disappointed because [the momentum] will start and it’ll suddenly die out,” said Soumya Rajan, CEO and founder of Mumbai-based Waterfield Advisors.

But recently there has been a “confluence of positive flows” from both domestic retail and foreign institutional investors due to an “amazing allocation towards equity investments,” Peeyush Mittal, portfolio manager at Matthews Asia, told CNBC. 

More companies are also adopting a “China plus one” strategy and setting up manufacturing operations in India, boosting the country’s long-term outlook, Nilesh Shah, managing director at Kotak Mahindra Asset Management said.

“There is a combination of positive sentiments, higher flows, and backing from the fundamentals which is causing the Indian market to move higher … Overall investments in India are on revival mode,” said Shah.

“So whichever way one looks at the economic numbers, India appears as an oasis in the global desert,” he added.

Although India’s monsoon season and general elections in 2024 could create volatility in the coming months, analysts remain optimistic and recommended four sectors.

Earlier this month, IDFC First Bank said its board had approved its merger with IDFC Ltd., which the company estimated would increase standalone book value by 4.9% compared with its financials as of March 31.

This came days after India’s largest private lender HDFC Bank completed its $40 billion mega merger with Housing Development Finance Corporation, making it the world’s fourth largest bank by market cap. 

Analysts said Indian banks also remained insulated from the Adani crisis. In February, short seller firm Hindenburg accused the conglomerate of decades of stock manipulation and accounting fraud.

“The fact that they weren’t caught on the wrong side of that entire trade was, was good. So clearly, their underwriting standards are looking much better,” she highlighted.

Matthews’ Mittal said India’s HDFC Bank and ICICI Bank are good buys and are set to continue taking market share from public sector banks. Shares of HDFC Bank have gained 1.4% so far this year, while ICICI Bank has jumped 11%. 

Although Rajan was optimistic, she remains neutral on banks as the sector “had a really good run, so the exponential upside is not huge, but will be fair.” 

Mittal also noted there are “decent” opportunities in non-banking financial names such as Bajaj Finance and Mahindra Finance. 

Bajaj Finance has gained 11% since the start of 2023, while Mahindra Finance surged by 26% during the same time. 

Rajan and Mittal are both optimistic on fast-moving consumer goods and mentioned Nestle India as a sector pick. The sector was “beaten down quite a bit” during the pandemic, but has shown strong recovery and positive growth in the short term, Rajan said.

Shares of Nestle India have climbed more than 15% since the beginning of the year, and both analyats expect they could continue to run further.

According to the World Bank, about 68% of India’s population is of working age (15 to 64 years old), a positive demographic dynamic for consumer spending.

“It’s as simple as consuming biscuits. If you extrapolate your biscuit consumption across a population of 1.4 billion, it’s still quite a lot,” Rajan said.

Rajan also noted that consumption is also rising in rural India, which stands to benefit companies like Hindustan Unilever and Britannia Industries.

“These companies are now suddenly realizing their power as the aspiration of Indians grow and they move towards branded products,” she added.

However, Rajan pointed out that India has a lot of catching up to do if it wants to match China’s manufacturing prowess.

Even though companies say that they are adopting a “China plus one” strategy, “that plus one has not necessarily been India, it could be other South Asian and Southeast Asian countries,” as the country is still grappling with shortfalls in its infrastructure, she said.

“The big play is of course around infrastructure and capital goods,” she added. “Whether it’s auto components or heavy engineering, these companies are expected to do well.” 

Investor sentiment in China remains weak as the country continues to miss growth expectations, and there are clearly industries and companies in India that have benefited from that, Rajan said. 

She emphasized that even if China’s economy rebounds more robustly in the next nine to 12 months, investors will remain interested in India. Rajan noted that investors can also include exposure to both economies in their portfolios.

Furthermore, Rajan noted domestic investors play a pivotal role in India’s stock market and that is “really what has kept markets more elevated.”

“It’s not as if our companies are necessarily looking for foreign markets or exports to survive or thrive.”