India's Economic Surge and Digital Innovation Drive Strong Growth Amid Valuation Concerns

India's economic surge and digital innovation drive investor interest despite high equity valuations and geopolitical shifts.

By Athena Xu

4/4, 01:35 EDT

Key Takeaway

  • India's economic surge and digital innovation drive strong growth, attracting global investment despite high equity valuations.
  • Political stability under Modi and business-friendly policies bolster investor confidence as India positions for robust growth.
  • Global firms recalibrate exposure to India, weighing stretched valuations against the country's promising economic outlook.

India's Economic Surge

India is experiencing a significant economic upswing, marked by a series of reforms that have positioned it for robust growth. The country recently surpassed the $2,500-per-capita income threshold, a milestone that typically heralds increased demand for a wide range of goods and services, including automobiles. This economic momentum is further bolstered by the geopolitical dynamics between the U.S. and China, from which India is emerging as a beneficiary. Despite these positive indicators, the valuation of Indian equities presents a challenge. Since November 2022, when the potential of the Indian market was spotlighted, there has been a notable increase in the valuation of Indian stocks, as reflected in the performance of the iShares MSCI India Index. However, the earnings of Indian companies have kept pace with this valuation surge, and the country's economic and fiscal outlook has significantly improved. Jitania Kandhari of Morgan Stanley Investment Management emphasizes India's unique position, noting its underinvestment and geopolitical advantages in a multipolar world.

Digital Innovation and Investment Influx

India's economy is poised to be the strongest globally this year, according to Capital Economics. A key driver of this growth is digital innovation, which is enhancing productivity across sectors. The property market is on an upswing, and banks are extending more credit following a period of addressing non-performing assets. The country is also witnessing a surge in private investment, with U.S. and European venture-capital firms establishing a presence to leverage the burgeoning startup ecosystem. Additionally, global companies are diversifying their supply chains by incorporating India, further testament to the country's growing economic clout.

Election Year Dynamics

The political landscape in India is under the spotlight, with Prime Minister Narendra Modi anticipated to secure a third term in the upcoming general election. Modi's tenure has been characterized by business-friendly policies that have significantly contributed to the country's economic growth. However, the election outcome remains a critical factor that could influence the continuation of these policies. Todd McClone of William Blair’s emerging markets strategies articulates the risk of waiting for a correction in Indian valuations, suggesting that the fundamentals of Indian companies are strong enough to justify current prices.

Global Shifts and Valuation Concerns

As the global investment community reassesses its positions, a shift is occurring from the previously popular "buy India, sell China" strategy. Firms like Lazard Asset Management and Manulife Investment Management are recalibrating their exposure to India, citing stretched valuations and regulatory cautions about market froth. This recalibration is partly in response to China's economic recovery, spurred by government support for the industrial and manufacturing sectors. Despite these adjustments, India's economic outlook remains promising, with expectations of continued growth and reform under Modi's leadership. However, investors are increasingly weighing the implications of India's high equity valuations against the backdrop of global economic and political developments.

Street Views

  • Jitania Kandhari, Morgan Stanley Investment Management (Bullish on India):

    "India is underinvested; India is underleveraged and in a geopolitical sweet spot in a multipolar world."

  • Todd McClone, William Blair’s emerging markets strategies (Bullish on Indian companies):

    "Fundamentals are so strong, and these companies are so good. If you are waiting for a big correction, you will miss the boat."