Indian Stocks Are A 'Must Have' For Diverse Investors, Says Jefferies

The Indian stock market may deliver an 8–10% dollar return over the next 5–7 years as a rise in weight in a global fund makes it a "must have" for a more diverse investor, according to Jefferies.

Adding to this, the country's renewed capex cycle, robust corporate earnings, structural domestic flows from savings to equities, and the potential listing of a large unicorn in India can drive market capitalisation beyond $10 trillion by 2030, the research firm said.

Currently, India is fifth largest in terms of market cap; its ranking in the Bloomberg World Index is eighth with a weight of just 2%, which means there is tremendous scope for foreign investors to increase investment in the fastest-growing country in the world, the research firm said in a Feb. 21 note.

India’s weight in the indices has started climbing, with the jump in the MSCI EM weight seen post-Covid-19 being remarkable. The higher weights in global indices are also important because of the crowding-in of foreign capital from multiple discretionary funds, it said.

"A rise in country weight in a global fund could make Indian stocks a must-have for a much more diverse set of equity investors, beyond just the EM-focused ones."

The strong institutional framework of regulators (SEBI, RBI) and intermediaries has helped develop a large domestic investor base. Sustainable investment habits give visibility of $50 billion per year in flow into equities from domestic investors, which will likely keep the valuations on the expensive side but also reduce market volatility.

India now has a macro story as good as any. During the two five-year terms of Prime Minister Narendra Modi’s NDA government, India has seen fundamental structural reform, which has created the framework for the country to realise its full potential in terms of taking advantage of its intellectual and physical capital as well as its positive demographics, Chris Wood of Jefferies said in the note.

"While global equity funds are barely invested in India at all, despite the fact that there is now consensus, as highlighted by headlines coming out of the Davos gathering this year, that India is the world’s next big growth story, This lack of exposure to India by global investors is, frankly,  absurd," Wood said.

Indian markets are still under-penetrated with just 5% of India's households saving in equities and mutual fund assets to GDP at just 16%. In comparison, the global average of MF assets to GDP is 60%, as per data compiled from the World Bank, the note said.

With growing awareness around investment through mutual funds by regulators and the Finance Ministry, "we expect to see much more savings flowing into India’s equity markets,"  the research firm said.

Robust demand for equities driven by rising domestic investors sets the stage for increased activity in the primary market in terms of IPOs, FPOs, block deals and PE/VC fundraising, the research firm said.

The premarket market activity will be driven by promoter stake sales, government disinvestment, the listing of large unicorns, and continued PE churning as seen in 2023.

IPOs of the large start-up base can drive attractive investor opportunities. The Indian Internet economy gave birth to over 100 unicorns over the last decade, making it the third largest unicorn hub only behind the U.S. and China.

These large unicorns have immense listing potential over the next 5–7 years.

Some examples of successfully listed startups in India are Zomato, Nykaa, PBFintech, Easemytrip, Infoedge, and Honasa Consumers. While some unicorns, such as Flipkart, Swiggy, Ola Electric, and PhonePe, can be listed in the near term. Some other large companies, like Reliance Jio and Reliance Retail, can soon see value unlocking once they demerge from Reliance Industries Ltd.

India has a vibrant democracy with 57 national and regional parties. The upcoming national elections in April and May 2024 will have one billion eligible voters.

Successive governments have adopted consistent growth and external relations policies. India has excellent relations with the western world, Japan, Australia and the Middle East, making it a key beneficiary of China+1.