The Indian stock market is boldly scaling new historical highs.

On December 11th, the Indian SENSEX 30 index broke through the 70,000 mark intraday, setting a new historical record. By the close of the day, the index stood at 69,928.53 points. Over the past two decades, the Indian stock market has experienced a long-term uptrend, and recently, the total market capitalization of the Indian stock market surpassed the 4 trillion US dollar mark for the first time, ranking after the United States, China, Japan, and Hong Kong, China.

Looking at the situation this year, there has been a "seesaw effect" in the capital flows between the Chinese and Indian stock markets. "After the adjustment of epidemic prevention and control measures at the beginning of this year, compared to China and India, the market generally favored China. In January, northbound capital inflows into the A-share market reached 150 billion yuan, while the Indian market correspondingly experienced outflows of foreign capital. However, less than a quarter later, domestic macroeconomic data did not meet expectations. Subsequently, overseas investors flowed into India in the third quarter." An observation by a fund manager.

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Why has the Indian stock market performed so strongly?

"The factors that have recently driven the Indian stock market higher include strong economic data, corporate earnings data, falling oil prices, and robust domestic capital flows," J.P. Morgan strategist Batra analyzed in a research report.

As for the foundation of the Indian stock market's long-term bull market, Guoxin Securities believes that although India's manufacturing industry is not mature, a large number of high-market-value service industry companies are sufficient to support the upward movement of the stock market. Large-cap companies generally have high growth potential and have become the backbone of driving the index higher; their market-oriented exchange holding structure has greatly enlivened the trading of the Indian stock market; the liberal foreign capital inflow system has encouraged net inflows of investment portfolios, forming the financial support for the long bull market in the Indian stock market.

What are the risks behind the rise of the Indian stock market? Hong Hao, Chief Economist at Si Rui Group, believes that the significant increase in India's money supply leading to currency devaluation and inflation issues should not be overlooked. "Since 1991, India's money supply has increased by 93 times, while the stock market has risen by 66 times. Therefore, at least more than half of the increase in the Indian stock index comes from currency devaluation and inflation."

A 1967% increase in 20 years

From December 4th to 8th, the Indian SENSEX 30 index led the Asia-Pacific market with a 4.24% increase.Looking at the long term, over the past three years, the Indian SENSEX 30 has led with a 54% increase. Since 2003, the SENSEX 30 index has accumulated a 1967% increase over 20 years.

In 2022, against the backdrop of significant interest rate hikes by the Federal Reserve, most major emerging market economies around the world experienced substantial outflows of dollar-denominated foreign investments and stock market declines. India also faced pressure from the repatriation of dollar funds, but this situation improved in the second quarter of 2023, when it attracted net inflows of foreign capital.

Describing the performance of the Indian stock market, Fund Manager Shi Jing from Manulife Fund used the word "resilience." She told Caijing that in the third quarter, global markets回调 under the background of a strong US dollar and unexpectedly rising US Treasury rates, while the Indian market performed brilliantly in the second quarter, and in the third quarter, it still recorded positive returns without considering exchange rate losses, showing strong resilience.

Why does India continue to attract attention? As India's population surpasses China's and its GDP (Gross Domestic Product) surpasses that of the United Kingdom, more and more opinions believe that India may become the next superpower in the future.

On December 5th, S&P Global released the "2024 Global Credit Outlook." The report pointed out that India will remain the fastest-growing major economy in terms of global GDP growth for at least the next three years, and it is expected to become the third-largest economy in the world by as early as 2030. The agency predicts that India's GDP growth rate will be 7% in 2027. In comparison, China's GDP growth rate may slow down to 4.6% in 2026.

Amidst the global economic slowdown, India's GDP grew by 7.6% in the second quarter, exceeding market expectations. The latest economic outlook report from the IMF (International Monetary Fund) estimates that India's GDP growth rate will be above 6% in both 2023 and 2024, making it one of the few countries in the world that can maintain high GDP growth over the long term.

CICC (China International Capital Corporation) analyzed India's development potential from five aspects: economic endowment, industrial policy, monetary and fiscal policy, international cooperation, and financial markets. The results show that India's biggest advantage is that its population is entering a dividend period. In recent years, the government has increased support for the manufacturing industry through industrial policies, which helps it better integrate into the global manufacturing industry chain. At the same time, India has strengthened technological cooperation with the West and accelerated domestic system reforms, releasing its economic growth potential.

In April of this year, the United Nations Department of Economic and Social Affairs estimated that India will become the most populous country in the world. Relevant data shows that India's current population distribution is pyramid-shaped, with nearly 80% of the population under the age of 50, and 610 million people under the age of 25, with a high rate of English proficiency, attracting foreign investment to come.The demographic dividend has become a favorable condition for the development of its manufacturing and service industries, providing opportunities for career transition. According to research reports from Fubon Securities, since 2018, due to technological confrontation and tense trade relations between China and the US, some international brand giants have started to diversify their production from China to other locations in 2022 due to the pandemic. India's demographic dividend, with a population of over 1.4 billion and a youthful demographic, has attracted consumer electronics giants such as Apple, Samsung, HP, and DELL to India. In 2022, India's export volume reached a new high of $21.3 billion, with a year-on-year increase of 45.4%.

In terms of industrial policy, according to an analysis by CICC, India's comparative advantage has long been focused on the service sector, with a continuous trade surplus in services and a persistent deficit in manufacturing. In recent years, the Indian government has increased its support for the development of the manufacturing industry, with the transfer of industries such as clothing and mobile phones, and the acceleration of development in the digital economy. The labor force and small and medium-sized enterprise systems that have constrained the scale effect of the manufacturing industry for decades have been revised, and the efficiency of resource allocation has improved.

Although India's export volume reached a new high in 2022, the significant increase in import volume still led to an expansion of the trade deficit. To improve the trade deficit situation, in 2023, the Indian government expanded public investment to create jobs and stimulate consumption, supporting the continued growth of domestic demand. Although the export of goods has weakened, the reduction in import costs and the growth in service exports will both alleviate the pressure on the trade deficit.

In order to secure re-election, the Modi government has also issued a series of policies that have rapidly promoted the development of the financial industry. The most critical of these was the "demonetization movement" in 2016, which invalidated the high-denomination notes of 500 and 1000 rupees and promoted digital payments and inclusive finance. After the demonetization order, people were required to deposit their then-largest denomination notes of 500 and 1000 rupees into bank accounts within a specified period. This achieved demonetization and effectively advanced the reform of electronic financial assets.

Opportunity or Bubble?

Shi Jing believes that due to the high degree of internationalization of the Indian stock market, overseas institutional investors are an important force affecting the Indian market. The strong US dollar in the third quarter led to the outflow of some overseas institutional investors from the Indian market, making the valuation of Indian blue-chip stocks not expensive at present. The increase in the valuation of the Indian market is mainly reflected in small and medium-cap stocks.

Liu Weilin, the fund manager of ICBC India Fund, believes that after China enters a new phase, seeking emerging market countries for high-speed economic development allocation is a good choice. "India, as a traditional agricultural country, relies more on the overall economy for its economic development. India's service industry is well-developed, and its IT industry, generic pharmaceuticals, and film industry all have certain advantages," she told Caijing, "Although India's manufacturing industry has not developed as well as China's, India is also actively promoting 'Make in India,' and they are considering whether their manufacturing industry can take over some of the future low-end industrial transfers from China."

Balancing and comparing between China and India has become an important issue for Asian investors. At the 2023 Milken Institute Asia Summit held in Singapore, speakers said that the Chinese market is facing headwinds but still has opportunities; India and Southeast Asia have become alternative markets worth investing in, but they also have their own risks.

As investment in India heats up, discussions about valuation become more intense. In 2022, against the backdrop of a global stock and bond market downturn, the Indian benchmark stock index still recorded a 4% increase, and it has continued to rise this year. In response to this situation, Goldman Sachs and CLSA have said that the valuation of the Indian stock market has been pushed very high, and after global funds have invested $13 billion in the Indian stock market this year, they may find better trading opportunities in other emerging markets in the future.

"Among emerging market countries, it is definitely not particularly cheap, precisely because people have more confidence in it. The current valuation level is slightly below the average. This indicates that although the Indian stock market has been rising for several years, there is not much bubble in it," Liu Weilin believes.Shi Jing believes that in the short term, attention should be paid to the risk of valuation adjustments, while in the long term, the resilience of India's economic fundamentals continues to persist.

Guosen Securities believes that in the long term, looking at the fundamentals, India plays the role of a "catch-up country" in emerging markets, maintaining high economic growth by replicating the urbanization and industrialization experience of advanced countries, and stocks have a long-term upward basis driven by profits. However, in the short term, looking at the capital side, its high dependence on foreign capital brings high volatility to the Indian stock market.

After examining the current economic situation in India, CICC believes that India has a low female labor participation rate, prominent shortcomings in infrastructure and business environment, land system constraints on scale development, and high capital market valuations, making investment in India not so easy.