Investing in India: how might reforms affect stockmarket returns?

With growth expected to have bottomed, what lies ahead for India’s stockmarket in 2018?



Andrew Rymer, CFA
Senior Strategist, Strategic Research Unit

India is the world’s largest democracy, with a population of 1.3 billion, spanning 29 states where over 1600 languages and dialects are spoken. Navigating an investment opportunity of this scale can be complex and challenging. We look at some of the risks and opportunities in the country and garner the views of some of our regional experts.

Driven by domestic growth

The investment case for India is underpinned by a strong domestic growth story. Demographics are highly favourable, with over 65% of the population younger than 35, and the government has a strong pro-reform agenda.

Infrastructure development is likely to drive growth over the medium term, while investment in education and healthcare is also needed.

India can also benefit hugely from reducing corruption and bringing the shadow economy into the formal sector. 

Modi – the reformer

Prime Minister Narendra Modi was elected in 2014, with his Bharatiya Janata Party (BJP) winning an absolute majority in parliament. This strong mandate has provided a foundation for the government to implement some much-needed reforms.

The first three and a half years of the government’s term saw a marked improvement in the economy: inflation stabilised, interest rates were lowered and the budget deficit was contained. This was supported by factors including weak commodity prices, notably lower oil prices, and an environment of benign global inflation. India’s relationship with the global economy has also improved with record foreign-exchange reserves and increased stability in the rupee. An improvement in the balance of imports and exports has also resulted in a lower current account deficit.

The key reforms to date include the unification of a complicated system of local state sales taxes, with a national Goods and Services Tax (GST) implemented last year. A new bankruptcy law, enabling bankrupt companies to be wound up in a more timely fashion, was passed in 2016. The government also announced a $32 billion plan to recapitalise state-controlled banks, in addition to a five year, $107 billion road investment plan. 

Tom Wilson, Head of Emerging Market Equities at Schroders, said:

“These reforms should lift potential growth and improve the fiscal structure in the medium-term. In addition there are ongoing efforts to encourage reform at a state level.

“It is also positive that banking system undercapitalisation and asset quality issues are being addressed. This should serve to improve the availability of credit and in turn support a re-acceleration in economic growth.” 

2017: a good year for Indian equities

Indian equities registered a strong return in 2017. The MSCI India index returned 39% in US dollar terms, outperforming the MSCI World and MSCI Emerging Markets indices, which returned 22% and 37%, respectively.

The year also saw a high number of initial public offerings (IPOs) and secondary offerings come to market. The listing boom was met with heavy demand from both individual investors and institutions.

Meanwhile, India was upgraded to one notch above investment grade by ratings agency Moody’s. The country also jumped 30 places and entered the World Bank’s Top 100 “ease of doing business” Index. 

Jinesh Gopani, Head of Equity, AXIS Asset Management, said:

“From an investor’s perspective, the IPO boom has helped new companies and themes come into the market. Given that many of these companies are profitable and have strong management credibility, they are helping to broaden the investment universe.” 

Why has economic growth decelerated?

Despite the strong equity market performance, economic growth actually decelerated last year. This was primarily attributable to disruption stemming from demonetisation and GST implementation. Demonetisation (announced towards the end of 2016) saw the withdrawal and replacement of around 86% of all banknotes in circulation, in an attempt to curb the black market.

Other measures such as Prime Minister Modi’s flagship “Make in India” policy, which aims to turn India into a global manufacturing hub, have so far had a more limited impact.  

Manish Bhatia, Asian Equity Fund Manager at Schroders, said: 

“Although disruptive in the near-term, these changes should be structurally positive for the economy, as they enhance tax efficiency and overall transparency in the system. 

“Post demonetisation, digital transactions have picked up, bringing more transparency to a system which was hitherto dominated by cash transactions. Meanwhile, the recent Union Budget revealed that the number of people filing annual tax returns increased by 41% last year.

“In the long-term these changes should also lead to a higher proportion of savings being invested in financial products, rather than physical assets like property and gold.”

Political outlook positive

Politics had a positive impact on the stockmarket in 2017. Prime Minister Modi’s BJP won a series of state elections, which augurs well for its re-election prospects in 2019 and the long-term outlook for reforms. However, results from the election in Gujarat, Modi’s home state, hinted at some frustration at the weakness in growth and the disruption experienced by the informal sector. 

Jinesh Gopani said: 

“The government has responded by pivoting towards boosting the rural economy, as well as housing and infrastructure spending. The recently announced 2018-19 Union Budget, the last full year budget before the next general election, includes measures that should support the rural economy, agriculture and healthcare. These are positive for growth in general, in addition to the specific economic sectors.”

“The priorities for 2018 are likely to revolve around reflating the economy as the government readies itself for the 2019 elections.”


The Indian equity market has performed well on the back of net capital inflows from foreign and domestic investors. From a valuation perspective, price-to-earnings and price-to-book ratios for the market as a whole are now above their long-term averages. However, there is a wide dispersion across sectors and stocks.

Manish Bhatia said:

“The strong capital inflows bear close monitoring, especially given that some segments of the markets are trading at quite rich valuations. Rising interest rates and commodity prices, especially oil prices, are the main risks to the economy”.

Jinesh Gopani said:

“Valuations are on the higher side, but earnings growth should help support markets from a medium to long-term perspective. We continue to believe that the economy has bottomed and that we should see a significant pick up in earnings momentum going forward.

“Aggregate earnings growth is forecast to be 10% for the financial year ending March 2018, but this is expected to pick-up to 22% for the year ending March 2019”


Andrew Rymer, CFA
Senior Strategist, Strategic Research Unit


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