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After soaring to new all-time highs, India’s equity market faces emerging headwinds in the outlook for Q4 2024, driven by tepid earnings and slowing GDP growth.
“While Indian equities maintained their upward momentum in September, they are off to a weak start in October probably led by a rebalance in global portfolios due to the fear of higher oil prices owing to the Iran-Israel conflict,” Gaurav Mehta, CIO of Alternatives Equity at SBI Mutual Fund, said.
Mehta further pointed out that the near-term trajectory has decelerated as commodity price tailwinds abate and revenue growth stays “anaemic”. However, SBI Mutual Fund stays constructive for earning over the medium term.
“We remain of the view that increasingly the market will become more discerning and move back towards companies which have strong business models, long-term earnings growth visibility and sustainable cashflows,” he added.
J.P. Morgan is cautiously optimistic over the near term. “An extreme heatwave followed by flooding has impacted demand, while earnings and growth in the last quarter have not met expectations,” said Rajiv Batra, Head of Asia Pacific (ex-Japan/China) Equity Strategy at J.P. Morgan.
Batra pointed out this differs from the last three years: “The market has been a bit range-bound rather than continuing with the same bullish trend we have been used to from 2021 onward.”
India’s long-term growth trend remains unchanged
While near-term factors weigh on market performance, a long list of positive, long-term economic drivers makes the outlook for India’s equity market compelling. These drivers include the favourable demographic (a large working-age population with a median age of 28), rising wealth, momentum in the manufacturing sector due to supply chain diversification, and growing renewable energy capacity.
„With the nation’s list of economic strengths and a government looking to unlock potential, the stage is set for a possible multi-year bull run, but the country’s export expansion targets — that will need to be backed by a strong manufacturing growth push — will be key,” opined J.P. Morgan.
The Asian Development Bank (ADB) just renewed its growth forecast for India as robust, expecting the gross domestic product (GDP) to increase by 7.0% in fiscal year 2024 (ending 31 March 2025) and 7.2% for next fiscal year FY2025. Last year, India’s economy grew 8.2%.
The global macro research team at abrdn expects Indian growth to moderate in the coming quarters, though it is likely to continue outperforming global growth rates.
Despite a sharper-than-expected slowdown in Q2, the domestic private sector remains resilient. According to abrdn, while the benefits of public infrastructure spending and exports are set to diminish, the private sector will need to play a larger role in sustaining growth.
“However, much will depend on the pace of reform to spur investment and job creation in more productive sectors. Still, risks are skewed to the upside, especially as a strong harvest could boost rural demand,” abrdn wrote in an insight.
India equity market – not “why” but “how” to get exposure
With a generally positive outlook for India, Matthews Asia says the question is not whether investors should get exposure to India but how.
“India has incredible growth rates coming out of many areas and segments as they adjust or benefit from the changes and the broadening out of the economy,” wrote Sean Taylor, Chief Investment Officer at Matthews Asia recently, highlighting financials and consumer discretionary.
“However, the perennial challenge for equity investors has been the rich valuations of stocks. Investors have to be prepared to pay more for businesses that they believe can grow and accelerate earnings and, at the same time, be cautious and mindful of liquidity and exuberance in pricing,” Taylor added.
