Indian Stock Market Hits New All-Time High

The recent interest rate cut by the Federal Reserve has sent ripples through the global financial markets, with India witnessing a remarkable surge in its stock indices. The SENSEX has climbed by 1.7% to touch an unprecedented 84,622.11 points, marking yet another historic high, while the NIFTY index also rose by 1.5%, reaching 25,849.25 points. Despite the elevated valuations that accompany such peaks, the Indian stock market continues to attract foreign investors, poised to record an impressive six consecutive quarters of growth.

Amidst this vibrant secondary market, the primary market is also experiencing a notable boom. However, it is essential to recognize that within this unchanging environment, investors are still modifying their stock preferences. There has been a noticeable withdrawal from Modi-themed stocks, with investors channeling their funds towards consumer goods and software sectors. The recent interest rate cuts by the Federal Reserve have sparked interest in rate-sensitive sectors, adding fuel to this ongoing market dynamic.

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It is noteworthy that the Indian stock market is on track to secure its sixth consecutive quarter of gains. Entering the ninth year of continuous rises, the market's price-to-earnings ratio (P/E) has now surged to double that of the MSCI Emerging Markets Index. The Nifty 50's price-to-earnings ratio stands at an impressive 21 times, a stark increase from its decade-average. This escalation in valuation comes on the heels of Prime Minister Narendra Modi successfully forming a coalition government, thus enhancing investor confidence in policy stability and continuity. The anticipated interest rate cuts from the Fed, combined with global market turbulence since August, have encouraged many foreign investors, who previously hesitated due to high valuations, to return to Indian equities.

According to recent media reports, foreign assets have net purchased $8.5 billion in Indian stocks this quarter alone, potentially setting a record for the highest influx of capital since mid-2023. This robust influx has buoyed Indian stock indices, with the MSCI India Index rising by 7% this quarter, outpacing the more comprehensive emerging market indices which saw only a 2% uptick during the same period. In fact, looking at September alone, it is projected that foreign funds will have a fourth consecutive month of net inflows into the Indian stock market.

Additionally, a myriad of exchange-traded funds (ETFs) linked to Indian equities listed in the US have also benefitted from the bullish trends in the Indian market. A prime example is the WisdomTree India Earnings Fund, one of the oldest and largest ETFs in this category, which has recently reached new highs and recorded an incredible 8% surge in a single month this past summer.

James Cheo, the Chief Investment Officer for HSBC Global Private Banking and Wealth Management for Southeast Asia and India, stated, “While valuations are indeed high, the Indian stock market remains attractive relative to other markets with weaker growth prospects. We anticipate that India’s economic growth will continue to be supported by strong corporate performance, favorable economic conditions, and supportive policies.” According to projections from the International Monetary Fund (IMF), India is set to emerge as the world’s third-largest economy by 2028.

It’s also essential to note that not only the secondary market, but the primary market in India is experiencing a surge in global investment interest, making it the most active market this quarter. Recent reports suggest that robust investor demand could see around 235 companies listed through initial public offerings (IPOs) this year, raising an estimated $8.6 billion, exceeding the total capital raised throughout 2023. Notably, there have been numerous mega fundraising projects valued in the billions of dollars.

For instance, Bajaj Housing Finance, a housing loan financing institution, listed in the domestic market in mid-September and raised ₹6,560 million (approximately $780 million). At the offering price, the company was valued at around $7 billion, and prior to the listing, it garnered nearly 64 times subscription in just three days. Moreover, last month, Ola Electric Mobility Ltd. raised over $730 million during its listing, while baby product retailer Brainbees Solutions Ltd. collected around $500 million. Additionally, NTPC Green Energy, a subsidiary of India’s state-run power company NTPC, recently submitted an IPO application seeking to raise approximately $1.19 billion.

However, despite the record highs in the Indian stock market, there has been a noticeable shift in investor preferences among sectors. The Modi-themed stock index, compiled by CLSA, only climbed by 2% in the 100 days following the start of his third term in early June. Conversely, consumer stocks and software stocks surged by 20% and 34%, respectively, during the same period. Data compiled by media outlets indicates that foreign funds shifted their approach in August, reversing previous trends by net selling stakes in sectors supported by Modi’s policies, which include utilities, cement, metals, and finance. Not only foreign investors but domestic mutual funds have also been gradually reducing investments in capital goods manufacturers, which previously stood as a significant driving force behind the Indian stock market's growth.

The underlying reason for this shift may be attributed to concerns regarding the stability of the ruling party. Analysts signify that the Bharatiya Janata Party (BJP), led by Modi, failed to secure an outright majority in the Lok Sabha and formed a government using coalition partners. This dependency on allies could potentially exacerbate populism, raising apprehensions among investors.

Mahesh Nandurkar, an analyst at Jefferies Financial Group, remarked in a recent report that the Modi government may struggle to meet its capital expenditure targets in this new term, posing a significant hurdle for the infrastructure sector, which is capital intensive. Consequently, the underperformance of Modi-centric stocks may continue until the end of this year.

The Federal Reserve's recent cut in interest rates has sparked the latest round of sector rotation. Following the announcement, interest rate-sensitive sectors, such as automobiles and financial services, received a boost as market dynamics shifted. Traditional key sectors, like fast-moving consumer goods (FMCG), have also performed well, primarily driven by expectations of strong earnings due to robust consumer demand and lower input costs. Conversely, growth-oriented stocks, particularly in the tech sector, have struggled; for instance, the Nifty IT index plummeted nearly 3% last Wednesday, reflecting the largest single-day drop since August 5, 2024. Major Indian tech firms, including Infosys, TCS and Tech Mahindra, were among the hardest hit in this downturn.