Nifty 50’s Underperformance and the Rise in Bond Investments
Not so long ago, India’s Nifty 50 index was outperforming the S&P 500 for the year. However, an 8% rally in U.S. stocks since the significant sell-off on August 5 has left the Indian benchmark trailing. Much of this American outperformance can be attributed to the realisation that the U.S. economy remains robust, whereas the lacklustre performance of Indian equities has been mainly due to their failure to positively surprise investors.
Earnings for Nifty 50 companies rose by 3% in the first quarter over the past year. Stripping out banks and energy firms, the rest eked out earnings-per-share growth of 19% in the most recent quarter compared to a year ago. Nevertheless, the stock market is a forward-looking beast, and these figures were within expectations. In fact, only 21 out of the 50 companies that make up the index surprised investors, while the rest fell short.
Analysts’ Concerns and Global Economic Impact
Many analysts fear that it won’t be long before nearly all of the market fails to outperform expectations. Even when a few companies do manage to exceed expectations, it might not significantly impact investors’ total returns. Amish Shah, an equity strategist at Bank of America, stated, “We believe that potential beats in Autos, Industrials, Healthcare, and IT may not be enough to offset the misses in Financials, Metals, and Energy. Besides, slowing global growth is a risk.”
A possible slowdown in global economic growth, potentially leading to a fall in commodity prices, isn’t helpful for India. However, it’s unlikely to derail the country’s growth trajectory. The South Asian nation has a consumer-led economy where exports aren’t yet a dominant feature. A fall in oil prices due to a global slowdown could even be beneficial, as lower fuel prices might lead to higher discretionary spending by its citizens.
The Disconnect Between the Stock Market and the Economy
Since the stock market isn’t representative of the Indian economy — with energy making up a significant portion of the Nifty 50 but a relatively small portion of GDP — any hit to oil and gas firms’ earnings leaves investors with wobbling returns. GDP growth, meanwhile, might continue to stay the course.
Investors have also raised the bar for future growth with lofty projections. To meet expectations, Nifty 50 companies’ earnings per share would need to grow by 13% compounded annually for three years, according to Citi. This is a tall order, yet tepid compared to even their previous expectations. Surendra Goyal, head of India research at Citi, mentioned, “Earnings revision, though still better than long-term trends, have moderated from upward revision trends and now are flattish since July. We find upsides limited at current levels — would be a buyer on any dips.”
The Shift to Bonds
Should investors sell out of equities? Is it worth risking future potential profits? Some investors think they may have solved the conundrum by turning towards a more stable instrument: bonds. “Indian equities are enjoying strong price momentum and earnings growth, but remain highly correlated to, and arguably dependent on, the continued performance of US equities in a late cycle environment,” said Maximilian Macmillan, a senior investment director at U.K. asset manager Abrdn. “Bonds offer diversification from this dominant and singular source of performance, though they are not risk immune.”
Data from the National Securities Depository Limited shows that foreign fund flows into Indian bonds have exceeded that of equities so far in 2024. In addition, bond funds have also had net inflows continuously since early 2023, barring one month. Equities, meanwhile, have seen foreign investors pull money in one out of every four months over the past two years. “While foreign investor flows in equities are volatile, India is attracting heavier foreign debt inflows owing to the listing of Indian sovereign bonds on global bond indexes,” said Shumita Deveshwar, chief India economist at TS Lombard.
Attractive Yields and Global Bond Index Inclusion
Aside from Indian government bonds being included in JPMorgan’s emerging market indexes, which has been one of the biggest drivers of fund flows, a diverse availability of India-specific bond funds has also helped. Actively managed funds such as Abrdn’s and Invesco’s India bond funds offer well over 7% yield. ETFs from iShares, L&G, and Xtrackers have also made it possible to meet the increased demand for Indian government debt.
“They are one of the very few investment-grade asset classes offering yields of around 7% — creating an excellent entry point [for] investors particularly as, unlike many other global bond markets, yields are higher than the Indian policy rate of 6.5% and the latest inflation print of 5.1%,” said Kenneth Akintewe, head of Asian debt at Abrdn.
Market Outlook and Expert Opinions
Concerns have also been raised over domestic mergers, such as the $8.5 billion Disney-Reliance merger, which India’s antitrust body fears might harm competition due to their control over cricket broadcast rights. This merger aims to create India’s biggest entertainment player, competing with Sony, Zee Entertainment, Netflix, and Amazon.
On CNBC TV this week, Praveen Jagwani, CEO of UTI International, said a good monsoon season will benefit Indian markets. “Indian markets tend to be cyclically in sync with the monsoon,” he added. Meanwhile, veteran emerging markets investor Mark Mobius mentioned there will “definitely be a correction” in the Indian stock market amid the unwinding of the Yen carry trade but expects the bull market to resume soon after.
