India market-cap to hit $10tn by 2030; sharp run near-term risk: Chris Wood

While market valuation is high, it should be seen in the context of the acceleration in growth, Wood says

India will achieve a market capitalisation of nearly $10 trillion by the turn of this decade compared with the current $4.3 trillion – a rise of around 132 per cent during this period, believe analysts at Jefferies led by Christopher Wood, their global head of equity strategy. The biggest risk in the Indian market, he suggests, is simply how well it has done of late.

"The market looks expensive, most particularly from a mid-cap standpoint. The Nifty Midcap 100 Index is now trading at 25.9x one-year forward earnings, compared with 20.2x for the Nifty. Still these valuations should be seen in the context of the acceleration in growth which should be anticipated as a consequence of the developing capex cycle, combined with the continuing commitment to government funded capex," wrote Christopher Wood, global head of equity strategy at Jefferies in his latest note to investors, GREED & fear.

At the bourses, meanwhile, the mid-and small-cap indices had a good run in calendar year 2023 (CY23). The Nifty Smallcap 250 index surged 48.1 per cent as compared to 43.7 per cent rise in the Nifty Midcap 150 index and 20 per cent gain in the Nifty50 index, shows ACE Equity data.

Like Wood, analysts back home, too, are now turning cautious on the mid-and small-cap segments. As of January 2024, the latest price-to-book valuation for the Nifty50 index, according to Varun Lohchab and Amit Kumar of HDFC Securities Institutional Research, was 114 per cent of the average historical valuation, indicating expensiveness.

The last time when this ratio crossed 100 and touched 103 per cent in FY22, the index declined by 1.8 per cent in the following financial year, i.e. FY23.

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That said, from a longer term perspective, Wood expects India’s contribution to world real gross domestic product (GDP) growth to reach 7.7 per cent by 2028, based on IMF projections, which assume only an average 6.3 per cent real GDP growth in India for the next five years. From a 10-year view, he believes India to be the best equity story in the world.

In his Asia ex-Japan long-only equity portfolio, Wood has trimmed stake in Reliance Industries (RIL) and HDFC Bank by one percentage point (ppt) each, while holding in State Bank of India (SBI) has been increased by 1ppt.

"Nearly two decades on and India is now in the early stages of another private-sector capex cycle. This is why it is quite realistic to project 7 per cent real GDP growth and 12-15 per cent earnings going forward. The last time India had a private sector capex cycle in the 11-year period between FY02 and FY12 the country massively outperformed the MSCI AC World Index in US dollar terms," Wood wrote.

The upcoming Lok Sabha elections later in 2024, Wood believes, will see the Narendra Modi-led National Democratic Alliance (NDA) come back to power, and such an outcome is no longer 'far-fetched'.

Modi has set a target of 370 seats for the Bharatiya Janata Party (BJP) and over 400 seats for the NDA in the upcoming general elections.

"It should be assumed that Prime Minister Narendra Modi’s goal will be to win a record number of seat for his BJP party. Such an electoral outcome is no longer far-fetched. As for the Congress Party, the dominant political party in India since independence in 1947, it faces an existential crisis," Wood said.