The start of 2023 was meant to be India’s. The nation’s fast-growing economy and rapidly expanding equity markets had convinced money managers from Morgan Stanley Investment Management to State Street Global Advisors to call it a top investment destination.
Then came the $50 billion selloff in billionaire Gautam Adani’s corporate empire.
Then came the $50 billion selloff in billionaire Gautam Adani’s corporate empire.
It’s a shock that forces Wall Street to reexamine its confidence on India’s expansion and its pro-business government, which helped the benchmark Sensex index trade last quarter at the highest in a decade versus the S&P 500. Those already-lofty valuations — combined with a scathing New York short-seller report attacking Adani Group — spotlights the contradictions within India’s runway for growth.
“India has to show its institutions are strong,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management, who owns the nation’s equities as part of his overweight emerging-market position. “Governance issues are a concern for all markets. But when valuations are higher than other countries, maintaining the integrity of the financial markets is critical.”
Investors have been increasingly drawn in by the narrative of opportunity in Indian assets. While bonds have been slowly making their way into global benchmark indexes, a flurry of companies have rushed to sell shares, increasing the size of the nation’s burgeoning stock market.
India’s stocks now account for more than 14% of MSCI’s emerging-market equities index, trailing only China, after it surpassed the weightings of Taiwan and South Korea last year. Morgan Stanley predicts India’s equity market is set to be the world’s third largest before the end of the decade.
But such optimism is what’s led shares in the Sensex index to trade at about 21 times their forecasted earnings, a metric that shows investors are willing to pay a premium on the prospect of stronger growth. Amid such high valuations, the Sensex index is headed for a second month of losses even as broader emerging equities rally.
The 100-page report by short seller Hindenburg Research last week containing allegations of stock manipulation and accounting fraud by Adani enterprises NSE 4.76 % added more fuel to selling.
Hindenburg released its report just days before the billionaire’s flagship firm
For some, including Hasnain Malik, a strategist at Tellimer in Dubai, “bad behaviour by one corporate, should that prove to be case in this instance, usually does not derail confidence in the entire equity market.”
“The long-term future of the market is great,” said the co-founder of Mobius Capital Partners LLP, which counts India as one of its top allocations.
- India is set to unveil its budget on Feb. 1, with Bloomberg Economics expecting the government to target a deficit of 5.7% of GDP in the year beginning April
- The government is also set to announce a record amount of debt sales in Prime Minister Narendra Modi’s last full-fledged budget before the 2024 elections
- Traders will watch data releases from China — including official purchasing managers’ surveys — for clues on the economic recovery after the end of Covid Zero.
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