Indian stocks to attract increased foreign investment after 2024 LS polls: Report

Global funds are currently underexposed to India's $4.3 trillion stock market, and investors will capitalize on any market downturn to bolster their holdings, according to Rajiv Batra of JPMorgan Chase & Co, reported Bloomberg.

These insights arrive amidst growing volatility in overseas investments ahead of the national elections, fuelled by concerns over inflated valuations.

“Foreign investors who didn’t increase relative positioning in India over last 2-2.5 years waiting for this clearing event, will start focusing back on growth-driven policies or reforms,” Batra, an Asia strategist at JPMorgan, wrote in an email interview with  Bloomberg.

According to the report, Goldman Sachs Group Inc. also echoes the same views about investment inflows as most people believe that Prime Minister Narendra Modi’s will return to power.

Another term for Modi is expected to ensure the extension of market-friendly policies, increased infrastructure spending, and a drive to attract foreign direct investment.

India is scheduled to conduct general elections spanning over six weeks from April 19, with the vote count set for June 4.

Investors will be closely monitoring the seat-sharing agreements if Modi's ruling party retains power, according to Batra, who is based in Singapore, the report said.

He underscored that policy consistency is crucial for India's market to maintain its elevated valuation or potentially experience further multiple re-rating.

“We estimate that if all benchmarked investors (EM, Asia ex-Japan, global ex-US and global) simply close their underweight positions on India, this would lead to $100 billion in inflows over the next few years,” he wrote in the interview with Bloomberg.

As of February-end, holdings of Indian stocks by global funds amounted to $763 billion, as per data from the National Securities Depository Ltd.

Foreign inflows have become erratic since the latter part of last year due to a continued surge in the stock market, leading to elevated valuations, the report said.

The NSE Nifty 50 Index, after concluding an eight-year winning streak in 2023, is now at risk of wiping out its gains for the year, sparking concerns about speculative excess in small- and mid-cap segments, according to the report.

Currently, the Indian market trades at a forward earnings estimate multiple of 20 times, notably higher than the MSCI Emerging Markets Index, which stands at 12 times.

Despite this, many investors argue that India justifies a higher premium compared to historical trends and emerging-market counterparts due to its robust growth prospects, advantageous demographics, and the expectation of political stability, said the report.

The Bloomberg report further quoted Sunil Koul, Asia Pacific equity strategist at Goldman Sachs as saying that global funds are “keen to raise exposure to India and are looking for better entry points.

“We expect foreign flows to pick up in the latter half of the year, given elections will be behind us and the overall liquidity environment will be supportive for EM flows, with central banks easing and a weaker dollar.”