 "HSBC")
India has outperformed emerging markets (EMs) in 15 of the past 20 years and developed markets in 14, HSBC has said in a report, calling the domestic equity markets a market “like no other”.
HSBC Global Research notes that the Financial Times Stock Exchange (FTSE) India Index has delivered an 11 per cent compound annual growth rate in dollar terms over the past two decades.
In comparison, the FTSE Asia Ex Japan is at 5.7 per cent, FTSE Emerging at 5.3 per cent, and FTSE Developed at 6.2 per cent.
The report further states that India’s share of total world market capitalisation has increased from less than 1 per cent two decades ago to over 3.6 per cent.
“Foreign investors view it as a large, liquid, domestically driven EM with a superior long-term growth outlook,” the note said.
The note adds that foreign investors have been steadily buying over the past two decades. However, they tend to sell at the hint of any global risk event.
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On the other hand, domestic investors have gradually emerged as more significant market participants over the past six to seven years. Since 2015, net domestic institutional investor (DII) flows have been more than double those of foreign investor flows.
“Higher DII inflows have been led by domestic mutual funds (MFs), which have emerged as an important conduit to drive household savings into equities via systematic investment plans, savings plans where investors make regular monthly payments. This is positive as it provides a cushion to the market during periods of high volatility since they are fairly sticky and reduce the risk of a major sell-off if investors become more risk-averse,” the note said.
The note also mentions that expensive market valuations have often worried investors. Nevertheless, even at premium valuation levels, the market has frequently offered pockets of reasonable value.
India stands out compared to its peers with a strong earnings outlook and a superior return on equity (RoE), enabling it to command a premium valuation, according to the brokerage.
HSBC predicts that earnings growth over the next two years will remain around mid-teen levels. This, coupled with superior RoE, makes India stand out in the region.
“For instance, despite a strong market run-up in recent months, sectors like financial and consumer discretionary still trade at a discount to their five-year mean,” said the note, adding that bottom-up value opportunities often have a favourable risk-reward ratio.
The note observes that a rising middle class increases demand for consumer durables, jewellery, clothing, cosmetics, automobiles, and experiences such as hotels, cinemas, and shopping malls. It also notes fast and increasing demand for MFs and other financial products, along with the possibility of private capital expenditure (capex) picking up next year.
Key investment themes in the medium term include government initiatives and reforms to support domestic manufacturing, accelerate exports, and boost capex and consumer spending.
