New Delhi
CNN
—
Over the past three decades, Peeyush Mittal has frequently driven the 185 miles from the Indian capital to the city of Jaipur. The journey always took him 6 hours.
“For 30 years there has been a promise to complete this journey in three hours. That was never possible,” said Mittal, portfolio manager at Matthews Asia, a San Francisco-based investment fund. “They expanded the highway, changed it from one lane to two lanes to three lanes, everything is done. But this journey always took six hours.”
Except last year, when he drove at 75 miles per hour on a new highway connecting the two cities and completed the trip in half the time.
“My jaw dropped the first time I was on that highway. I thought, “Wow, how is this even possible…in India?” he said.
The quality of India's new infrastructure is just one of many reasons why Mittal, who manages funds focused on emerging markets, and other investors are this way I am excited about the country's growth prospects.
Financial experts around the world have noted India's performance since 2014 under two-term Prime Minister Narendra Modi, who said he wanted the South Asian country to become a $5 trillion economy by 2025.
The optimism in the world's most populous country stands in stark contrast to the mood in China, which is grappling with a host of economic challenges, including an accelerating capital flight from the country.
Its stock markets have suffered a lengthy slump since recent highs in 2021, wiping out more than $5 trillion in market value on exchanges in Shanghai, Shenzhen and Hong Kong. Foreign direct investment (FDI) fell sharply last year and fell again in January, by almost 12% compared to the same month in 2023.
Indranil Mukherjee/AFP/Getty Images
The market value of companies listed on Indian stock exchanges crossed $4 trillion at the end of November.
Meanwhile, the Indian stock market is hitting record highs. The value of companies listed on Indian stock exchanges exceeded $4 trillion at the end of last year.
The future looks even brighter. According to a Jefferies report on Thursday, India's market value is expected to more than double to $10 trillion by 2030, which would make it “impossible for large global investors to ignore.”
“China is a no-go, so… what is the other country that can perhaps replace China?” Mittal said. “There is no country like China except India…in some form or fashion it is the replacement that the world may be looking for to drive growth.”
Japan has benefited from investors looking for an alternative to China – the benchmark Tokyo index hit a new high last week for the first time in 34 years, helped by rising corporate profits and a weak yen. But the country is in recession and recently lost its position as the world's third largest economy to Germany.
The latest revision by global stock index compiler MSCI reflects optimism towards India. MSCI said this month it would increase India's weighting in its emerging markets index to 18.06% from 17.98% and reduce China's to 24.77%.
MSCI's indices help institutional investors worldwide decide how to invest money and where to focus their research.
“India's weight in the MSCI emerging markets index was about 7% a few years ago,” said Aditya Suresh, head of India equity research at Macquarie Capital. “I think 18% [in the MSCI index] Does it naturally lean towards 25%? Yes, that is clearly why our conversations lead us to believe.”
As India heads toward national elections in the coming months, market watchers are hoping Modi's ruling Bharatiya Janata Party wins a third term, bringing with it greater predictability of economic policy over the next five years.
“If Modi comes back with a majority and there is political stability, I can say with confidence that there will be a lot more investor interest in India on a more sustainable basis,” Mittal said.
There are good reasons for the euphoria in India. From a growing young population to humming factories, the country has many advantages.
The International Monetary Fund expects India to grow 6.5% in the next fiscal year, compared to 4.6% for China. Analysts at Jefferies expect the country to be the world's third-largest economy by 2027.
India is similar to China more than three decades ago only at the beginning of an infrastructure transformation that is spending billions on building roads, ports, airports and railways.
There is a “very strong multiplier effect” on the economy from investments in digital and physical infrastructure that “you cannot reverse,” Suresh said.
The world's fastest-growing major economy is also trying to benefit from companies' rethinking of supply chains. Global companies are looking to diversify their operations outside China, where they have faced obstacles during the pandemic are exposed to risks arising from tensions between Beijing and Washington.
“India is a prime candidate to benefit from supply chain friendshoring, particularly at the expense of China,” wrote Hubert de Barochez, market economist at Capital Economics, in January.
As a result, some of the world's largest companies, including Apple supplier Foxconn, are expanding their operations in India. Tesla (TSLA) CEO Elon Musk said last June that his company wanted to invest in India “as soon as possible.”
“[Modi] He really cares about India because he pushes us to make significant investments in India, which we plan to do,” Musk told reporters.
But some fear India's confidence borders on hubris.
As interest in the world's fifth largest economy grows, the High prices for Indian stocks are scaring off some international investors.
Indian stocks have always been expensive compared to other emerging markets, Suresh said, but now “the premium to the premium has widened.”
Domestic investors, both retail and institutional, appear to be brushing aside these lofty valuations, driving the Indian stock market to unprecedented highs.
According to Macquarie, retail investors alone own 9% of the Indian stock market value, while foreign investors own nearly 20%. However, analysts expect foreign investment to pick up in the second half of 2024 once the elections are over.
R Satish Babu/AFP/Getty Images
Workers work at the Chennai Metro Rail Project construction site in Chennai city.
There is another potential challenge. Despite his new economic bravado India is unable to absorb all the money flowing out of China, whose economy is still about five times larger.
China “has a few too many companies valued at $100 billion to $200 billion or more.” [in value]said Mittal. “It’s difficult to find a home in India for that kind of money.”
But the fact that India's rapid recovery is being driven by domestic investors is strengthening the country's strength and reducing its dependence on foreign capital flows.
“It just massively isolates India from global dynamics,” Suresh said.
Beyond geopolitical unrest and uncertain economic prospects, foreign companies and investors have become increasingly wary of domestic political risks in China, including the possibility of raids and detentions. Institutional investors are still very cautious about buying Chinese stocks, even though many now look like bargains.
“There are a lot of good companies in China, but with all the regulatory issues, it will be very difficult to predict what they will look like in the long term,” said Priyanka Agnihotri, portfolio manager at Baltimore-based Brown Advisory.
India, on the other hand, has good relations with the West and other major economies and is aggressively courting large companies to build factories in the country.
In her budget speech in February, Indian Finance Minister Nirmala Sitharaman said FDI inflows since Modi first took office in 2014 had reached nearly $600 billion, double the previous decade.
“To promote sustainable foreign investment, we are negotiating bilateral investment agreements with our foreign partners in the spirit of First Develop India,” she added.
Analysts say it will be difficult to stop the economic juggernaut that India has unleashed, regardless of what happens with China.
“Even if China comes back to the table and solves a lot of problems, I don’t think India will fade into the background any more,” Mittal said. “It arrived.”
Comments are closed.