India in 2024: a trio of new positive catalysts

In 2023, India became the world’s fifth-largest equity market behind the US, China, Japan and Hong Kong, with its market cap surpassing USD 4 trillion. We believe that India is a long-term structural story and that 2024 should bring three positive catalysts to its equity market. The first two are macro-related and the third is political.

Firstly, a well-supported currency. The INR was solid in 2023 (practically stable), as the central bank kept interest rates high, rebuilt foreign exchange reserves to a level just 6% shy of all-time highs and tamed core inflation from a starting point of 6.5% in January to 4.5% in November. In 2024, the expected soft landing in the US will mean Federal Reserve rate cuts and continuing soft oil prices. Both of these factors will be incrementally supportive for the INR. Additionally, the inclusion of Indian government bonds in the JPMorgan EM index by June of this year should lead to an estimated USD 30 billion of inflows, equivalent to just under half a month of imports.

Secondly, the long-awaited rural recovery should take shape in 2024. The rural economy accounts for at least one third of India’s GDP. It was weakened in the last two years by rising interest rates draining liquidity, in conjunction with high inflation. Lower rates kicking in, likely after Q2 2024, will help liquidity, while the inflation shock is being digested. Mass market FMCG companies, which are typically 35-50% exposed to rural markets, currently indicate that rural weakness has stabilised, although it has yet to show decisive improvement.

The runup to national elections in May 2024 may well include some handouts in rural areas, which would boost rural consumption. Consumer confidence indicators in recent months already showed continuous progress, which bodes well given that private consumption accounts for close to 60% of India’s GDP. In early December, the RBI upgraded its 3/24 real GDP growth forecasts from 6.5% to 7%, and Q1 25 (ending June 2025) forecasts from 6.6% to 6.7%.

FIG 1A. India Core CPI tamed in 2023 & FIG 1B. Consumer Confidence surpassed pre-Covid 2019 levels

Source: Bloomberg & Source: RBI.

On the political front, a third mandate for the Bharatiya Janata Party (BJP) looks increasingly likely and would support equity markets. Elections in five States in late November, representing one-sixth of Indian voters, produced a favorable outcome for the BJP, which won in three of the four key States by an unexpectedly wide margin and a considerable increase in seats. From the perspective of households, corporates and markets, a continuation of the current administration would be positive, given the structural reforms, increased capex and geopolitical strength the government has secured for India in the last decade.

On the capex front, in particular – although we may witness a temporary slowdown in the coming months as some resources are channeled into short-term measures aimed at winning votes – we believe core investments in road infrastructure, railways, electrification, PLI, etc., are non-reversible and will underpin growth in the next term.

TABLE 3. Election results

Source: Election Commission of India.

In addition to the above new catalysts, there are existing factors that should continue to drive equity market performance:

1. Foreign flows into the PLI scheme (reducing India's import dependence and relocating global export manufacturing to India from China) are well-documented and continuing. One aspect is India’s cost advantage, which we don’t expect to come under pressure: companies in labor-intensive segments like property development or electronics-manufacturing services are very comfortable with the labor supply, according to our research. Workforce quality also appears adequate: our November on-the-ground visits of a semiconductor and an auto plant in Chennai left us impressed with the factories’ efficiency, and with the high degree of local staff including at management level, suggesting scaling up is achievable. The Industrial sector performed strongly in 2023 (up 26% versus 15% for MSCI India), and we expect EPS growth for a number of industrial companies to surpass 20% CAGR in the next couple of years.
    
2. The government also continues to provide support by reducing friction at different levels of the economy. An example is in logistics: the last section of the Delhi-Mumbai expressway, opened in October, has cut transport time to 10 hours, one of numerous initiatives in road/rail/air to lower logistics costs as a percentage of GDP. Anecdotally, a diagnostics lab chain told us that increased flight frequency allows them to fly samples of increasingly complex tests from Africa into their Mumbai central laboratory. High-end hotel chains reported that they were actively looking to expand the land bank around Delhi airport. The government also seeks to increase online adoption and boost the portion of the population involved in online commerce from 6% currently to a target of 75%. To this end, the government created the Open Network for Digital Commerce (ONDC), an open and free platform connecting merchants and buyers. ONDC had a merchant base of 235,000 in December. As a reminder, the UPI (unified payments interface) or free instant payment system through mobile launched by authorities in 2016, now captures over 75% of all digital transactions in India. Finally, with a view to stimulate credit growth and financial inclusion, the RBI has authorised the consent-based sharing by licensed entities of consumers’ financial data, via an Account Aggregator network. To date, eight of India’s top banks have joined this network. 

FIG 2. Manufacturing wages 2022, USD / hour

We see upside potential in the three core areas of consumer, banks and manufacturing, which account for the bulk of Asia High Conviction’s exposure going into 2024.

We expect consumer discretionary spending to stay robust in 2024. The wealthiest 100 million individuals who pay taxes (80 mn), use a credit card (80 mn), own a passport (over 90 mn), or use asset management services (over 35 mn) have low sensitivity to pricing as supply of higher-end goods and services remains lower than demand. The property market continues to strengthen in volume with healthy price increases; SUVs make up a growing share of the auto market; and hospital chains report patients are increasingly upgrading to private rooms, helped by the expanding penetration of insurance coverage.

Beyond the post-Covid reopening, which has clearly spurred travel, hotel chains sound confident in their ability to raise Average Daily Rates due to limited supply, particularly at the high end. Although we find mass consumer names less attractive, it is interesting to see FMCG companies develop a more polarised offering with higher-end products able to command higher ASP, while also developing more value-for-money products. 

Loan growth was strong in 2023 and should remain solid in 2024, in our view. Banks underperformed in 2023 on concern about lower asset quality and for idiosyncratic reasons (e.g., HDFCB and HDFC’s lengthy merger¹). In spite of RBI’s prudent step to increase risk weight on consumer loans by 25% in November (back to 2019 levels), which led Pay to lower its growth guidance, we understand from other large robust banks that loan growth has not been materially impacted and expect them to take market share.

We expect growth rates of 20% or more in areas like cables and wires, lighting equipment, cement for infrastructure and electronics manufacturing. ER&D (Engineering Research & Development, i.e., the designing and developing of devices, assembly processes or applications through software) is also a promising segment, where Indian companies can offer solid technology and affordable labor to large international industrial groups.

Although Indian equity valuations are close to all-time highs, our Asia High Conviction strategy is currently overweight India². We acknowledge there could be a risk of consolidation in the next few months, on any negative headlines pertaining to elections or to slowing of capex ahead of this. The risk of a US hard landing is currently not priced in by the market and has arguably been reduced by the Fed’s more dovish stance in mid-December.

Although India’s economy is heavily domestic, exports of goods and services account for over 20% of GDP (e.g., IT Services), hence a US hard landing might shave some 100bp off the expected 6.6% GDP growth in 2024. This would impact job creation and be a setback for mass consumption. Unless the likelihood of such a scenario increases, we would probably use the opportunity of any market consolidation to add.