Song of India – The Globe and Mail

The recent rebalancing of the MSCI Emerging Markets Index is a significant development in our view for Indian equity markets. Global funds tracking these indices will be required to increase their allocation to Indian equities, which could lead to increased liquidity and positive price effects. Since 2020, India’s weighting in the MSCI Emerging Markets Index has doubled to almost 20%, while China’s weighting has declined to 24% from 42% (see Chart 1). This change underscores India’s growing influence on the global investment landscape and could trigger an estimated $3 billion in inflows.¹ likely benefiting underrepresented sectors.

Structural Factors Driving Growth in India

India’s long-term market potential is based on several key trends we are seeing:

Rising incomes and consumption: A rapidly growing middle class (expected to double by 2047 to make up over 60% of the population)²) is driving growth in consumption, especially for premium goods and services. This demographic shift should continue to be a key driver for consumer goods, retail and financial services.

Digital revolution: India’s digital transformation, supported by affordable data and ubiquitous digital payments, is opening up new opportunities in e-commerce, fintech and digital services. We believe these sectors are poised for steady growth as digital penetration increases.

Production growth: Structural reforms and geopolitical changes are making India a growing manufacturing hub, particularly in the technology and industrial sectors.

Infrastructure development: Government infrastructure projects such as smart cities and improved connectivity are expected to drive growth in construction, materials and related industries.

Risk and Impact of India

The Indian banking sector’s loans have grown at a faster pace compared to deposits. As a result, bank loans as a percentage of gross domestic product (GDP) are at higher levels than they were before the pandemic. Given the concerns of the Indian central bank, this could lead to a crackdown on household credit, weighing on consumer spending.

Moreover, a slowdown in government spending following the June elections is likely to have lowered GDP growth in the April-June quarter of 2024.³ The government’s fiscal consolidation target could further constrain government spending. The government is targeting a fiscal deficit of 4.9% of GDP for the current fiscal year ending March 2025 and 4.5% of GDP for fiscal year 2025-26.⁴ The budget deficit for the fiscal year ending March 2024 was 5.6% of GDP.⁵ While fiscal consolidation is expected to be offset by sales of government assets, any reduction in government spending could impact GDP growth.

India’s Long-Term Growth History

The post-election environment in India has created the conditions for further economic reforms and stabilization. In our view, the country’s political will and policy initiatives are creating a favorable environment for business and investment. Structural reforms introduced over the past decade have improved governance, streamlined regulation, and made India a more attractive destination for global capital.

The performance of the Indian stock market is mirroring the growth in GDP, reflecting the country’s growing share in the global economy. As India continues its journey towards becoming the world’s third-largest economy by 2030, according to S&P Global Ratings,⁶ We believe that equity markets are likely to enjoy continued interest from domestic and international investors.

Strategic investment opportunities

The key sectors that we believe will benefit from India’s growth include:

Financial Services:Rising incomes and digital innovations are driving demand for financial products.

Technology and digital services:India’s leadership in the IT and digital sector ensures steady growth for the country.

Consumer Discretionary Goods:A growing middle class is shifting towards higher-end consumption, which benefits the consumer goods and retail sectors.

Infrastructure and industry:Government projects and urbanization drive long-term growth in construction and materials.

Application

Equity markets in India are experiencing sustained expansion, supported by economic reforms, strategic initiatives and growing interest from global investors. We believe the MSCI rebalancing is an important catalyst that is likely to generate significant and sustained capital inflows. For investors, a diversified approach that leverages India’s structural growth drivers while taking into account global risks offers an attractive long-term opportunity.

Notes

1. Source: “India’s middle class to almost double to 61% by 2046-47: PRICE report.”
2. India Brand Equity Foundation. July 2023
3. Source: “India’s economic growth likely slowed to 6.9% in the last quarter as government spending lagged.” Reuters poll. August 25, 2024.
4. Source: “India cuts fiscal deficit target to 4.9% of GDP for fiscal 2025.” Reuters. July 23, 2024.
5. Source: “India’s fiscal deficit in fiscal 2024 improves to 5.63% of GDP, narrower than government’s target of 5.8%.” Mint. May 31, 2024
6. Source: “India to be world’s third-largest economy by 2030 – S&P Global Ratings.” Reuters. December 5, 2023.

Stephen Dover, CFA, is Franklin Templeton Chief Market Strategist and Head of Franklin Templeton Investment Institute. Originally published in Stephen Dover’s LinkedIn Newsletter, Investing this week. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments, as well as Global Market Outlook bulletin. Christy Tan, investment strategist at Franklin Templeton Institute, contributed to this article

Reservation

What are the risks? All investments involve risks, including the possible loss of capital. The value of investments can go down as well as up, and investors may not get back the full amount invested. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory changes affecting the sector. Special risks are associated with investing in foreign securities, including risks related to political and economic developments, trade practices, availability of information, limited markets, and currency fluctuations and policies. Investments in foreign securities involve special risks, including currency fluctuations, economic instability, and political changes. Investments in emerging markets, of which emerging markets are a subset, involve increased risks related to the same factors, in addition to those related to the smaller size of these markets, lower liquidity, and the lack of an established legal, political, business, and social framework supporting securities markets. Because this framework is typically even less developed in emerging markets, and various factors, including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in emerging markets. To the extent that a strategy focuses on specific countries, regions, industries, sectors or types of investments from time to time, it may be subject to greater risk of adverse events in such areas of focus than a strategy that invests in a broader range of countries, regions, industries, sectors or investments.

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