Indian Stock Market Soars; When Will China's Market Bounce Back?
Wow! The Indian stock market has surged nearly twice in just a few years! It has become the fourth-largest capital market globally! When will the A-share market be able to turn things around like the Indian stock market?
According to a report on December 6th, local time in India, its stock market value has successfully broken through the previous $4 trillion, becoming an important player on the world stage, second only to the United States, China, and Japan. It is worth mentioning that its main benchmark index, the NSE Nifty 50, has seen an astonishing increase of more than 13% this year and has the potential to create a dazzling record of continuous growth for eight consecutive years globally. In just three years, the market value of listed companies on the Indian stock exchange has increased by a whopping $1 trillion. Another important benchmark index, the S&P BSE Sensex, has also climbed to a new historical peak.
So, why has the Indian stock market been able to show such a large continuous increase? And how will the future market trend develop? Let me reveal the most critical reasons for you. First, the most obvious advantage of the Indian stock market is its strong protection mechanism for small and medium investors. This undoubtedly attracts the attention of a wide range of investors because it means they don't have to worry about becoming the "chopsticks" in the capital market. Specifically, 1. India implements a T+0 trading system for retail investors, while institutional trading is set to T+3; (for your information, T+0 means you can buy and sell on the same day, while T+3 means you can only sell after three days, which means retail investors are more flexible than institutions)
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2. Secondly, for major or controlling shareholders in India, their long-term holding requirements are quite strict: Specifically, if an investor holds shares for more than a year, the reduction ratio in the first year cannot exceed 25%, then the reduction ratio gradually decreases to 15% and 10% in the second and third years, respectively, and only after the fourth year can they fully realize free reduction. As for the short-term holding requirements for major or controlling shareholders, if they hold shares for less than a year, the reduction ratio in the first year is limited to below 50%, then it gradually decreases to 35% and 25% in the second and third years, respectively, and finally reaches the lowest 10% after the fourth year, only after the fifth year can they fully realize free reduction. Otherwise, investors may face severe punitive measures such as fines.
In contrast, what about us? The market is full of various violations and cash-out behaviors, and market value management is endless. After the implementation of the registration system, a large number of IPO companies are rushing to distribute dividends before going public, emptying the company's assets and then going public for financing again. It can be seen that the lack of regulation has created a huge gap between our market and the Indian market. Although the principle of "protecting small and medium investors" is strongly advocated verbally, the reality is that our market has not implemented stricter reduction restrictions on major and controlling shareholders.
In addition, the Indian market has also adopted a relatively relaxed policy for the introduction of international capital. Taking 2023 as an example, the net inflow of overseas funds into the Indian stock market exceeded an astonishing $14 billion. However, this is undoubtedly a double-edged sword. In many past stock market crashes, the rapid withdrawal of overseas capital often becomes the last straw that breaks the camel's back. Therefore, some commentators have expressed concerns, believing that some investors have deep concerns about the overvaluation of the Indian market and the overcrowding of transactions.
However, looking back at the recent bull market trend in India, this concern seems not entirely valid. According to the analysis of J.P. Morgan strategist Rajiv Batra in his research report, he believes: "The key factors driving the continuous rise of the Indian stock market include sustained economic growth at home and abroad, improved corporate profitability, a decline in oil prices, and good domestic capital flow conditions." Indeed, India's recently announced third-quarter Gross Domestic Product (GDP) grew by 7.6% compared to the same period last year, ranking first among the world's top ten economies, with growth rates of 6.1%, 7.8%, and 7.6% in the first three quarters, respectively.
Many Wall Street investment banks have raised their expectations for India's economic growth rate, including Barclays Bank and Citigroup, which predict that India's economy will achieve a 6.7% growth rate during the fiscal year 2023-2024, up from the previous forecasts of 6.3% and 6.2%, respectively. Similarly, Morgan Stanley has revised its GDP growth forecast for India in the fiscal year 2024, from the initial 6.4% to 6.9%. According to this forecast, the Indian stock market is expected to maintain a performance above 10% of the global emerging market benchmark for the next three consecutive years.
Recently, Goldman Sachs upgraded its rating of the Indian stock market to "buy," stating that it predicts India has the best structural growth potential in the region. Nomura Holdings also maintained its "buy" recommendation for the Indian stock market in its latest report on Asia and Japan strategy released last week. According to public data, since 2022, overseas investors have net purchased Indian stocks worth more than $15 billion, while domestic funds in India have also quickly invested more than $20 billion in the stock market. Among them, the net purchase amount of overseas investors in 2022 reached an unprecedented $17 billion.
In addition to the fundamentals, on the news front, the election results last weekend showed that the ruling Bharatiya Janata Party (BJP) of India won key victories in three of the four state assembly elections, which is conducive to Indian Prime Minister Modi's re-election in the May general election next year. Analysts believe that for investors, BJP's victory has eliminated potential political risk factors to a certain extent, consolidating Modi's position before the Indian general election next year, making more people bet on the continuity of Indian government policies. Wilson Asset Management's portfolio manager Matthew Haupt said: "BJP's victory in local elections can enhance investor confidence, and we may see capital continue to flow into India, extending the time of the Indian stock market's continuous rise."However, is there really no risk in the significant surge of the Indian stock market? This fervent market condition has also prompted some analysts to warn of the risks of overvaluation and crowded trading. The forward earnings expectation of the S&P BSE Sensex index is currently at 20 times, slightly higher than the five-year average and above the global stock market's 16 times. Stock market volatility has also been climbing in tandem with the index recently. At the same time, data statistics show that the number of Indian investor accounts has skyrocketed from 3.93 million in December 2019 to 13.23 million by the end of October 2023. The influx of retail investors may also pose challenges to market regulation. Ajay Tyagi, former chairman of the Securities and Exchange Board of India (SEBI), stated, "Retail investors with limited financial knowledge hope to make easy money, yet the market is bubble-prone."
Moreover, the risks from election outcomes have not been entirely eliminated. Chris Wood, Global Equity Strategist at Jefferies LLC, said that the 2024 Indian general election remains a significant risk. If the ruling BJP suffers an unexpected defeat similar to that in 2004, a 25% or even larger correction in the Indian stock market is anticipated. He added that if the BJP loses the election, although the current government's series of radical reform projects would not be canceled, there would be "significant adjustments." In May 2004, the then-ruling National Democratic Alliance lost the election, and Atal Bihari Vajpayee, the founder of the Bharatiya Janata Party and three-time Prime Minister, submitted his resignation, leading to a roughly 20% plunge in the Indian stock market within two days.
In summary, the significant rise in the Indian stock market is supported by reasonable fundamentals and news, but there are certain risks and uncertainties. Investors should remain rational and cautious, avoiding blind chasing of gains or panic selling. Instead, they should choose appropriate strategies and products based on their risk preferences and investment objectives, diversify risks, and seize opportunities.
Finally, I just want to say: The stock investors in the A-share market have indeed suffered a lot. When will the A-share market counterattack?
From a valuation perspective, the market is currently at a low point, but there is still some distance from the historical low (2018), which requires our close attention.