2023 was supposed to be India's year. With a rapidly growing economy and expanding equity markets, the country was seen as a top investment destination by major money managers. However, things have not gone according to plan. The report by short seller Hindenburg Research last week alleging stock manipulation and accounting fraud by Adani entities added more fuel to the selling pressure on the stock.
Then came the $50 billion selloff in billionaire Gautam Adani's corporate empire. This was a huge blow to Adani, who had built up his empire over many years. However, he has vowed to continue to grow his businesses and create jobs for the people of India. The recent stock market crash in India has come as a shock to Wall Street, which had been confident in the country's economic expansion and pro-business government. The crash has cast doubt on the lofty valuations of Indian stocks, which had been trading at record highs relative to the S&P 500. The crash has also brought to light the contradictions within India's growth story.
Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management, said that India needs to show that its institutions are strong. He noted that governance issues are a concern for all markets, but when valuations are higher than in other countries, it is especially important to maintain the integrity of the financial markets.
Indian stocks have historically traded at a premium to other emerging markets stocks. This premium is due to a number of factors, including India's strong economic growth prospects, relatively stable political environment, and large and liquid capital markets.
Investors have been increasingly drawn in by the narrative of opportunity in Indian assets. While bonds have been slowly making their way into global benchmark indexes, a flurry of companies have rushed to sell shares, increasing the size of the nation’s burgeoning stock market. This has created opportunities for investors looking to get in on the ground floor of a rapidly growing economy.
India’s stocks now make up a larger share of MSCI’s emerging-market equities index than any country except China. Last year, India’s weighting in the index surpassed that of Taiwan and South Korea. Morgan Stanley predicts that by the end of the decade, India’s equity market will be the third largest in the world. But such optimism has led shares in the Sensex index to trade at high valuations, even as broader emerging equities rally. Amid such high valuations, the Sensex index is headed for a second month of losses.
The report by short seller Hindenburg Research last week alleging stock manipulation and accounting fraud by Adani entities added more fuel to the selling pressure on the stock.
Hindenburg's report was released just days before Adani Enterprises Ltd., the flagship firm of billionaire Gautam Adani, launched India's biggest ever primary follow-on public offering, seeking to raise 200 billion rupees ($2.5 billion). In a 413-page rebuttal published Sunday, the Adani Group said that Hindenburg Research's conduct was "nothing short of calculated securities fraud." The group also stated that the research company was attacking India as a whole. Hasnain Malik, a strategist at Tellimer in Dubai, believes that bad behaviour by one corporate does not necessarily mean that confidence in the entire equity market will be derailed.
The potential collapse of one of India's largest businesses could hamper the country's ability to compete with China as an attractive investment destination.
According to Jon Harrison, managing director for emerging-market macro strategy at TS Lombard in London, Indian stocks will be vulnerable to portfolio shifts as investors reduce their exposure to expensive assets and instead bet on China’s economic reopening. This shift could benefit Taiwan and South Korea.
Carrhae Capital LLP, which had a successful year with its emerging-market hedge fund in 2020, is betting on China's reopening in 2021. According to Ali Akay, the firm's London-based chief investment officer, they will only seek bargains in Indian "structural growth" stories if "investors rush out of India to chase the China story."
Akay said that, in his opinion, the structural story in India has not changed much. He added that the increasing perception of China as a strategic competitor rather than a partner has enabled India to assume the mantle of the regional bulwark against China that the West needs to build up and integrate further with.
In an environment of increased geopolitical risk, India provides a degree of safety, said Gaurav Mallik, chief investment strategist at State Street Global Advisors. The money manager has an overweight position in India, drawn to a growing middle class that bodes well for consumption plays. Mark Mobius, who has spent more than three decades in the investment industry, plans to increase his investment in India. India's young and growing workforce has the potential to boost productivity, but only if the country can invest in education and infrastructure.
The co-founder of Mobius Capital Partners LLP believes that the market has a great future ahead. Mobius Capital Partners LLP has a strong focus on investments in India.
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