India equity market outlook

After an impressive bull run since the pandemic, Indian stocks were down around -9% in late last month from record high¹ driven by a cyclical slowdown, before recovering some of the loss recently. We believe that the recent pullback could be opportunity to buy the dip and to snap up some Indian equities.

While I anticipated a soft GDP print for the November-ending quarter, the actual print came in much lighter than expected +5.4% y/y (vs estimates of 6.5% and 6.7% in the prior quarter).²

The current economic slowdown, coupled with some negative headlines surrounding one of India’s largest conglomerates, could be the reasons behind foreign capital outflows.

Still, the equity market has shown resilience, with domestic inflows to mutual funds offsetting around half of the foreign fund outflows.³

Green shoots in private consumption

This current slowdown appears to be cyclical which is natural phenomenon that occurs in almost every major economy. On a sequential basis, manufacturing and domestic consumption growth slowed but I believe that seasonality in the current and next quarter should show improvement.

Private consumption makes up around 60% of India’s GDP⁴, which means that for a recovery to occur, it will require Indian consumers to pull out their wallets.

Already we’re seeing green shoots. The festival season has already started, the extreme weather patterns have passed and the boost in agricultural production in the final quarter should lead to higher levels rural consumption.

Additionally, the contentious general election is behind us and the government is laser-focused on getting growth back on track, and is likely to accelerate infrastructure stimulus in the coming months.

A boost in domestic demand coupled with higher government spending and a Reserve Bank of India (RBI) potential policy rate cut around the corner, could galvanize private enterprise capex to pick up and perk up the ears of foreign investors.

Risk factors to watch out for

That said, risks remain. The RBI kept its policy rate unchanged during its December meeting as inflation remains elevated. The current cyclical slowdown in the domestic economy could certainly benefit from RBI rate cuts.

I’m also keeping a close eye on any legal developments between the US Department of Justice and Indian corporate entities. So far, local investors have largely shrugged off the legal developments and I believe contagion risks from the scandal are low.

Buy-on-dip opportunities

Still, while there may be reasons for investors to think that India’s macro story is down, it’s economy and markets are not out.

Growth is set to accelerate in the coming couple of quarters boosted by government investment and improved domestic consumption.

All of this leads me to believe that the headwinds to the market and economy are receding and for foreign investors sitting on the sideline fretting about high Indian stock valuations, this could be the time to buy the dip and to snap up some Indian equities.

Plus, the month of December has historically been a good one for Indian stocks, with the Nifty closing 3/4ths of the times higher over the past 30 years - with an average of 3% from the previous month.⁵   

Investment Risks:

The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations), and investors may not get back the full amount invested.