While geopolitical conflicts may have a limited impact on markets, India requires stronger growth drivers to propel its equity markets forward, according to Christy Tan from Franklin Templeton. Tan suggests that the absence of these drivers, coupled with rich valuations, could restrain potential upside in the Indian market. Consequently, she emphasizes the need for investors to be increasingly selective in their approach to Indian assets to achieve better returns.
Tan's analysis comes at a time when optimism appears to be returning to global markets. However, she raises the question of whether this optimism is sustainable or merely a temporary calm. She also notes that the market is shifting towards being driven by fundamentals rather than sentiment, particularly following more conciliatory stances on trade and deals. Despite this shift, Tan cautions that markets remain sensitive and reactive to external factors, which could trigger volatility.
To achieve sustained growth in the Indian equity markets, Tan points out the necessity of stronger driving forces. The lack of these drivers, combined with high valuations, may limit upside potential, making selectivity crucial for investors seeking returns from Indian assets.
Franklin Templeton's Stephen Dover and Christy Tan have previously offered insights into the expanding opportunities within India's equity markets, highlighting the country's growing and diverse market. They noted India's increased importance in the emerging market equity universe, driven by the latest MSCI rebalancing. This rebalancing is expected to catalyze increased portfolio flows into India, further enhancing the market's growth potential. Several growth drivers underpin India's long-term market potential, including a growing consumer base, a digital revolution, a manufacturing surge, and infrastructure development. Investment opportunities are seen in financial services, technology and digital services, consumer discretionary, and infrastructure and industrials.
The recent MSCI Emerging Markets Index rebalancing is considered a significant development for India's equity markets. Global funds tracking these indexes will likely increase their allocation to Indian equities, potentially leading to a surge in liquidity and positive price impacts. Since 2020, India's weight in the MSCI Emerging Markets Index has doubled to nearly 20%, while China's allocation has decreased. This shift underscores India's growing influence in the global investment landscape and could drive substantial capital inflows. Structural reforms over the past decade have improved governance and streamlined regulations, making India a more attractive destination for global capital.
However, there are also potential risks. Concerns raised by India's central bank regarding household credit could lead to a crackdown, impacting consumption spending. Additionally, a slowdown in government spending may affect GDP growth. The government is aiming for fiscal consolidation, which could further curtail government spending.
Despite these challenges, India's long-term market potential remains strong, supported by rising incomes and consumption, a digital revolution, and structural reforms. As India progresses towards becoming the world's third-largest economy by 2030, its equity markets are likely to see sustained interest from both domestic and international investors.
