India's Stock Market: Will the Bull Run Continue?

India’s stock market has been on a strong upward trend, hitting new all-time highs in 2024. Even though there was some volatility during the general elections, Indian stocks have consistently performed better than other emerging markets.

Since March 2020, when the pandemic caused a market crash, India’s leading stock index, the NSE Nifty 50, has grown by over 200%. Now, the Indian stock market's value stands at around $5 trillion, as more investors are optimistic about India's long-term economic growth.

Despite this strong performance, there have been some bumps recently. Trading has become more volatile, and in the first quarter of 2024, earnings were weaker than expected. India's GDP growth also slowed down, reaching its lowest level in 15 months. These factors have made some investors more cautious.

The growth in India’s stock market has largely been driven by domestic institutional investors and a surge in retail investors. This increased interest is creating a positive cycle of more liquidity, greater stock coverage, and more capital coming into the market.

However, India is still underrepresented in the portfolios of major emerging market investors, and foreign investment has slowed in recent months. For example, foreign investment in Indian stocks in June and July was strong, but in August, the country saw an outflow of $0.5 billion.

India’s economy is one of the fastest-growing in the world. In 2024, India’s GDP is expected to grow by 6.5%, and over the next five years, the International Monetary Fund (IMF) predicts a growth rate of 6.1%. By 2027, India is expected to become the world’s third-largest economy, trailing only the United States and China. By 2030, its GDP is projected to double to $7 trillion.

In the short term, the economy may face challenges from fluctuating demand and unusual weather patterns, which could hurt corporate earnings. However, India’s long-term economic outlook remains positive. The country’s structural strengths, including its young population, urbanization, wealth creation, government infrastructure projects, and growth in manufacturing and renewable energy, continue to attract investors.

India’s "demographic dividend," or the advantage of having a large working-age population, is expected to last until at least 2055. This demographic boost will peak around 2041, when about 59% of the population will be of working age. Additionally, India’s middle class is growing quickly, expanding at a rate of 6.3% per year since 1995, and now makes up about a third of the population.

India’s presence in global stock indexes is also growing. The country now represents 20.5% of the MSCI Emerging Markets Index, an all-time high, and this percentage is expected to continue rising.

While the Indian economy has a lot of strengths, there are still challenges, especially in the manufacturing sector. India’s government has set ambitious goals to increase goods exports to $1 trillion annually by 2030. Currently, manufacturing accounts for less than 20% of India’s economy, a figure that has stayed flat over the past decade. Much of India’s recent investment in manufacturing has focused on replacing imports rather than driving export growth.

For India to reach its long-term economic goals, it will need to expand its manufacturing sector, which lags behind the services sector in terms of contribution to GDP. The services sector, which includes industries like IT, biotechnology, and commerce, is already a global leader.

However, the manufacturing sector will need to grow significantly to help India reach its ambitious economic targets by 2030 and beyond. India’s Prime Minister has set a goal for the country to achieve "Viksit Bharat" (developed nation status) by 2047.

Despite these challenges, there are positive signs for India's manufacturing and export industries. Global companies are increasingly looking to reduce their dependence on China, and India’s lower labor costs make it an attractive alternative. Additionally, exports have become the largest contributor to India’s GDP since the pandemic, and government incentives to boost the sector are starting to show results.

In summary, while India’s bull market has been strong, there are short-term challenges like earnings slowdowns and volatile GDP growth. However, the country’s long-term economic outlook remains robust due to favorable demographics, a growing middle class, and government policies aimed at boosting infrastructure, manufacturing, and renewable energy.

If India can overcome its challenges in manufacturing and continue to attract global investment, its stock market and economy could continue to grow for many years to come.

--Source - JP Morgan