Weekly Buzz: India’s stock market just hit the $4 trillion milestone

India's stock market just hit a new milestone – it’s now valued at more than $4 trillion. In less than three years, the world’s fifth-largest equity market has added $1 trillion to its total valuation, now closing the gap with Hong Kong’s market. What’s behind this momentum?

India’s ongoing growth story

Despite a slowing global economy and a string of interest rate increases at home – designed to both bolster the rupee and rein in inflation – India’s economic output rose 7.6% in the three months leading to September this year.

What’s driving all this growth? In short, its people. India’s now the world’s most populous nation, and its young and growing workforce is a key factor contributing to its rapid economic growth. Today, there are about 961 million people comprising India’s working age population – by 2050, it’s projected that this number will grow by another 158 million.

And consider the impact of rising incomes on a country of this size. PRICE, an Indian think tank, projects that the country’s middle-class and middle-rich households will drive about $2.7 trillion in incremental consumption spending by 2030 – that’s nearly the size of France’s GDP.

When growth is plentiful, there’s plenty of reasons for investors to get excited. This in turn is reflected in stock market valuations, which explains this surge to $4 trillion.

Are Indian stocks too pricey?

There’s more to consider when it comes to India’s $4 trillion stock market valuation. As with any purchase, its price should reflect its real value. For stocks, this means earnings potential. And India’s looking a little pricey here.

This chart places the MSCI India (an index of large and mid-sized Indian companies) relative to its peers, comparing current and average price-to-earnings premiums. In all three cases, both the MSCI India index’s current and average premiums have expanded a lot more compared to its peers.

That said, you could argue that this market premium is justified by the country’s growth potential and relatively better economic performance, and that Indian companies can grow into these valuations.

After all, compared to a decade ago, India’s fundamental outlook is now looking a lot better. Besides its previously mentioned rising middle class, inflation is under control, and the government’s made good progress with economic reforms over the past few years. For a deeper dive into India, check out our recent CIO Insights!

As an investor, what does this mean for me?

While the path ahead will see its ups and downs, India's got a good chance at strong growth over the long term – so it’s no surprise that investors have now pushed its stock market to this $4 trillion milestone. And if you’re also thinking of investing in India, consider our Flexible Portfolios – we recently added an ETF that lets you invest directly in the country.

But keep in mind, it’s always a good idea to make sure you’re not too concentrated in any one market – especially a developing one like India. If you’ve got money in an emerging market fund, you probably already have some sort of stake in India, so take that into account when figuring how much more exposure you want.

This article was written in collaboration with Finimize.

💡 Investors’ Corner

You might want to reconsider cash during a rate pause

With sluggish economic growth, sticky inflation, and interest rates that are higher than they’ve been in decades, it’s no surprise that a lot of investors have been tempted to move to the sidelines, to seek comfort in cash.

Back when interest rates were shooting up, that made sense, but now that the US Federal Reserve (the Fed) has likely hoisted rates as high as they’re going to go, it’s a tougher call. And sitting on the sidelines – hoping for a clearer picture on policy rates – might mean you’re missing out on what’s happening with other assets.

This chart shows how stocks, bonds, and cash perform during specific phases of the Fed’s rate cycle. And in times like these, when the Fed’s taking a breather between hiking rates and cutting them, stocks and bonds usually outpace cash, by a lot. It might still be a little early to see rate cuts any time soon, but this pause tends not to linger. In the five rate-hiking cycles since 1990, the Fed took only about 10 months to go from hike to cut.

We’re still likely to see positive but slower economic growth in the upcoming year (check out our 2024 Macro Outlook for the bigger picture!). That probably means potential returns in the stock market in the near future – food for thought if you’ve been sitting on the sidelines so far.