Indian stocks bounce back – should you invest?

(Image credit: Getty Images)

“The new Modi government looks a lot like the old one,” says The Economist. Indian voters recently stripped prime minister Narendra Modi’s governing BJP party of its parliamentary majority for the first time in a decade, leaving it to rely on smaller parties to stay in power.

Concern that a shaky coalition could undermine growth saw Indian markets plunge 6%, wiping $400 billion off stocks in a single day earlier this month. However, Modi has assembled a coalition that is broadly “sympathetic to his pro-business” agenda, with many of the key ministers from the last term remaining in place.

The result? The BSE Sensex index “clawed back all its losses” within a week and is up 7% since the start of the year. Modi has already achieved much since coming to office in 2014, says John Reed in the Financial Times. His government has “stabilised” a “wobbly macroeconomy”, implemented much-needed tax reforms and powered into the digital economy.

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But India still faces “deep structural challenges” in areas such as farming, where “mass protests” have seen off previous attempts at reform. New Delhi wants to build up India’s manufacturing base, but that requires difficult changes to labour and land laws. As one local business commentator puts it, if Modi didn’t manage these reforms in the last 10 years, “why would we see them now that the BJP doesn’t have the majority”?

Complaints about a “two-track economy” that leaves too many people behind gained more traction than expected at the polls, says Jon Sindreu in The Wall Street Journal. That could well force Modi to “shift some of the attention he has paid to infrastructure and investment” toward social programmes to placate angry voters.

Nevertheless, growth will continue as already agreed infrastructure projects bed in. Capital expenditure has hit more than a third of GDP. The “Indian growth story remains a compelling one”.

Is it a good time to buy Indian stocks?

The Mumbai bourse’s recent gyrations serve as a reminder that professional investors are horribly “bad at assessing political risk”, says Nicholas Spiro in the South China Morning Post. India is the world’s most expensive major equity market on a forward price-to-earnings basis, surpassing even the US. Indian shares deserve some of that premium thanks to rapid growth, quality companies and a “geopolitical sweet spot”.

But local stocks look “priced for perfection”, leaving them vulnerable to bad news. Indeed, some foreign money managers have been quietly pulling out in recent months, taking the share of foreign ownership of Indian stocks below 18%, the lowest since 2012. Instead, local retail investors are “powering the rally”.

India’s election result shouldn’t radically derail its impressive growth trajectory, says Thomas Mathews of Capital Economics. The economy could well double in size over the coming decade. But that doesn’t make Indian stocks especially compelling.

A “very benign” backdrop for India – from improved economic stability and the global hunt for alternatives to China – already looks priced into shares. Indian stocks have had a good run, but further world-beating returns will be a tall order from here.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.