Invesco’s outlook: a supportive view on India’s stock market
The election of India will be conducted from 19th April – 1st June and the final results will be counted on 4th June with the new administration sworn in by mid-June.Initial polls and recent local elections suggest the possibility of a landslide by the BJP and its key allies, also known as The National Democratic Alliance (NDA)1.A landslide win by NDA that gets close to 400 seats could lead to a very positive equity market reaction. Domestic sectors such as consumer staples & discretionary, industrials, infrastructure, public sector undertaking (PSU) and financials are likely to benefit and could outperform.Invesco expects an outright BJP victory with over 272 seats and that Prime Minister Modi remains in power2 (Base Case Scenario).Invesco believes that, India’s stock market valuations are supportive for the following three reasons:1.Strong corporate earnings growth- Strong demand from the manufacturing and consumer discretionary industries is increasing pricing power and driving earnings growth.
- Corporate earnings across all industries continue to show an upward trend, with return on equity (ROE) reflecting growth.
- It is expected that by fiscal year 2024, the ROE of Indian companies may hit a ten-year high of 15%. Rigorous and orderly expansion is more likely to push ROE to continue to rise.
- Indian companies have experienced strong profit growth, with average earnings per share growth of 22% over the past five years. Earnings are currently experiencing a significant cyclical uptrend.
- The earnings per share growth of Indian companies is much higher than that of most developed economies and emerging markets and is expected to reach about 17% by 2024.
- Historical trends confirm that India's economic growth can be translated into substantial corporate profits.
2.Strong corporate fundamentals- Over the past decade, Indian companies have been able to manage their balance sheets effectively and maintain low-leverage positions, thereby benefiting from demand-led growth.
- The debt-to-equity ratio of Indian companies is at a historical low of about 0.5 time
3.Positive macro factors- Structural shifts in the Indian economy over the past decade have brought confidence to the market.
- India’s growth upcycle is expected to generate strong earnings over the next three to four years.
- The expected decline in interest rates will boost market confidence in India's future cash flows, while its strong relative growth will further benefit this positive outlook.
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- Latest opinion polls for 2024 Lok Sabha elections by India Today, ABP, India TV, Times Now.
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