What you need to know to invest in India

India has been one of the strongest and most consistent emerging stock markets, buoyed by its vibrant corporate sector and fast growth. However, it has faced challenges, particularly the impact of the Covid pandemic.

A recent history of investing in India

In recent months, the Indian stock market has continued to defy the weaker economic data. The MSCI India Index was up an annualised 14.67% for the three years to 31 August 2021 in local currency terms. This puts it comfortably ahead of most emerging markets. The MSCI Emerging Markets Index was up 11.32% over the same period and the MSCI BRIC 10.83%.

While the Indian market saw a significant drop in early 2020, losing around one-third of its value, it quickly recovered and the most recent wave of Covid infections barely registered. It now sits at over 40% higher than its pre-Covid levels, up 52.45% in a year. Importantly, Indian markets have remained resilient even when emerging markets have drifting out of favour. For example, over the past three months the MSCI Emerging Markets Index is down 3.49%, while the Indian market is up 11.84%.

There is a broad range of investment options in India

The Indian market is diversified. While the giant energy conglomerate Reliance Industries has a chunky share of the index, technology and financials are the most important sectors: technology is around 18% of the index, with Infosys and Tata Consultancy the biggest names, while financials form 26% with names such as ICICI Bank benefiting from the growth of India’s middle class. Investors should also note that there are consumer staples names such as Hindustan Unilever mixed in – growing consumption is an important driver for the Indian economy.

There are also plenty of investment opportunities further down the market capitalisation spectrum. The MSCI India Small Cap Index, for example, measures the performance of more than 250 smaller companies – around 14% of the market capitalisation of the Indian stocks. Recent performance for the small cap index has been strong – up 76.03% in the year to 31 August 2021. This is also where many of the exciting emerging companies are to be found, in new industries and geared to domestic growth.

There is also a buoyant private market in India, which has seen strong inflows. Morgan Stanley research showed $25 billion flowed into venture capital and private equity funds in the year to July. This is also helping to ensure a rich seam of new companies coming to market.

India is one of the largest markets for gold and the growing middle class is driving demand. Culturally, gold is synonymous with wealth and status and so is a popular investment option. Sovereign gold bonds are issued in tranches by the Reserve Bank of India on behalf of the Government of India, throughout the year. As the second wave of Covid infections started to pass in August and people started planning social events and weddings, where gold plays an important role, the gold share price was steadier.

How to invest in India?

The oldest stock market in India is the BSE Sensex, which invests in 30 of India’s largest and most actively traded companies. It crosses multiple sectors. The NSE (National Stock Exchange) Nifty or CNX Nifty is similarly diverse, covering the 50 largest stocks across 22 sectors. Finally, the NSE CNX Mid Cap is its mid cap equivalent, comprising 100 mid cap stocks.

The recent strength of the Indian market has made it difficult for active managers to beat. There are plenty of well-established managers in the region, including Aberdeen Standard and Fidelity. Over three years, the top funds are the UTI India Dynamic Equity, GS India Equity Portfolio and the Fidelity India focus. These funds will aim to target the best stocks to buy in India for the longer-term. All have outpaced the index, but only just.

This makes a case for passive investment. Here, there are plenty of options. The best index funds for generalized exposure to the Indian market are conventional, diversified Indian ETFs – such as the iShares MSCI India or the Invesco India ETF. There are also specialist smaller companies ETFs, including the iShares MSCI India Small-Cap ETF. These sit alongside specialist ETFs such as the Van Eck India Growth Leaders, which targets the fastest growing Indian companies, or the WisdomTree India ex-State-Owned Enterprises Fund, which excludes companies with more than 20% government holdings.

One final point: the market currently looks expensive. It trades on a P/E of 31x, compared to just 16x for the wider emerging market index. Its price to book measure is also higher. The Indian market has generally traded at a higher valuation than other emerging markets, but it does leave it vulnerable to a change in sentiment. This may affect the best stocks to buy in India in the short-term. In this environment, an active manager may be able to perform better because they are not compelled to hold companies where the value is falling.

Either way, the Indian market is diverse, holding many opportunities for investors to participate in the growth of the Indian economy, plus new and emerging industries. Despite the country’s challenges, it remains one of the most exciting emerging markets.

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