How to play on the Indian stock market dynamics

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A bronze bull statue at the entrance to the Bombay Stock Exchange building in Mumbai. The Indian stock market has surged this year.

Dhiraj Singh / Bloomberg

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There may be even more juice in Indian stocks, the surprise stars of emerging markets this year. Just be careful with initial tech public offerings.

The


iShares MSCI India

the exchange-traded fund (ticker: INDA) has jumped 25% since the start of the year. Global emerging markets are stagnating, dragged down by poor performance in China.

There are two reasons why other gains might be in sight: the present and the future. The present is freezing like few people would have imagined last spring, when India’s horrific Delta wave captured the world’s attention. Deaths from Covid-19 have plunged 95% from a peak in May. Three quarters of the adult population have received at least one injection of the vaccine.

As a result, the economy is roaring, on track to grow 9.5% this year and 8.5% in 2022, according to the International Monetary Fund. Interest rates are at an all time high of 4%. A reserve of $ 630 billion in foreign exchange reserves and a current account surplus should allow the central bank to gradually tighten without blowing up the rupee.

Low rates and pandemic isolation have doubled the list of Indian retail investors to 40 million, said Venkat Pasupuleti, co-portfolio manager for India at Dalton Investments. The government of Prime Minister Narendra Modi is carrying out a long-awaited privatization. It just passed Air India to a private investor, and a more than $ 10 billion IPO for the Life Insurance Corporation of India is expected early next year.

“We are actually seeing a government that makes promises and keeps them,” said Jimeet Modi, CEO of Samco Securities in Mumbai. “The markets continue to be exciting.”

Then there is the future. India’s digital economy is roughly where China’s was in 2014, when


Alibaba Holding Group

(BABA) has gone public, said Rishi Kapoor, co-CEO of private equity firm Investcorp. The digital economy accounts for around 10% of India’s gross domestic product, compared to 40% in China today. One in 10 Indians shopped online before the pandemic; nearly half of all Chinese do.

Covid was the starting point to catch up. “The inflection point for India is now,” Kapoor says. “We have made more new investments there than anywhere else in the world since 2019.”

The problem is, India’s new tech names are pricing themselves like they’re already Alibaba, whose stock tripled in six years before clashing with the Chinese government. Actions in the pioneer of food delivery


Zomato

(543320. India), which was supposed to start a golden age of IPO, has fallen 5% since their post-issue rebound in July. Pasupuleti doesn’t have higher hopes for ongoing issues like digital wallet holder Paytm or insurance broker Policy Bazaar. “Each of these companies are reaching insane valuations,” he says.

A better way to play India’s inflection is to use established companies that are growing rapidly through new digital channels, says Brian Freiwald, manager of the Putnam Emerging Markets Equity fund. One of his best choices is


Apollo Hospitals

(500869. India), whose telemedicine branch is booming. Another is fast food franchisee


Jubilant FoodWorks

(533155 India), who can deliver many more Domino’s Pizza and Popeyes Chicken with online ordering.

Pasupuleti prefers the relative safety of large financial corporations as


ICICI Bank

(IBN) and


Axis Bank

(532215. India), who still have not taken advantage of the happy combination of high growth and cheap money. “The dynamics of this market may last a few more years,” he says.

With Modi in power until 2024, many investors agree. Not at any cost.


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