What Makes Indian Stock Market Outperform Global Indexes

Indian equity benchmarks have outperformed their global peers this year and are currently trading near record highs. At the same time, fears of recession and high inflation, even touching 40-year highs, have hindered the US and European markets. To gain some perspective on the resilience of Indian equity market, one can compare the benchmark indices of India and the US.

While the National Stock Exchange’s Nifty 50 index has gained over 3 per cent year-to-date (Y-T-D), the US' benchmark index Dow Jones has dropped over 7 per cent, the tech heavy Nasdaq has crashed 29 per cent and the larger S&P 500 index is down by 17 per cent. In addition to high inflation and fears of a subsequent recession, the spike in US bond yields has also led to a shift in money from equities to debt in the world's biggest market, according to analysts.

In recent times, the fundamentals of Indian economy have seemed to change for the better as the country became world's fifth largest economy surpassing the UK. Additionally, foreign investors are treating India as a preferred destination. India attracted highest foreign direct investment (FDI) worth $83.57 billion in financial year 2021-22 despite the fatigue of Covid19 pandemic and the ongoing Russian war on Ukraine. 

The country's FDI inflows have increased 20-fold since FY03-04, when the inflows were $4.3 billion only, according to Ministry of Commerce and Industry. Meanwhile, economic reforms in the aftermath of Covid-19 pandemic in the form of production linked incentive (PLI) schemes have also boosted investor sentiment towards Indian corporates. Improving corporate earnings and lowering of non-performing assets (NPAs) in banking sector have also led to positive sentiment towards Indian corporate sector, analysts added.

Citing reasons for the resilience of Indian equity market, Ravi Singh of GCL Securities says, “If we see the Indian market since 2007, it has outperformed US market. Even during the Russia-Ukraine war we outperformed the US market. Meanwhile, import of Russian oil at lower rates, keeping inflation under control and companies like Samsung and Apple making India their manufacturing hub are also some of the factors making India an attractive investment destination.”  
 
Foreign institutional investors (FIIs) turned net buyers of Indian equities in November which shows the appeal for Indian stocks at time when people are talking about global economy entering a phase of recession.

Manoj Dalmia, founder and director of Proficient Equities adds correction in dollar index as an additional factor that makes emerging market equities an attractive investment option. He says, “Based on positive cues from US markets that hyperinflation is starting to cool down from highs, and the dollar index coming down from highs, emerging markets will help attract foreign inflows to equity markets.”

Foreign investors have infused close to Rs 19,000 crore in Indian equities so far this month following a net outflow of Rs 8 crore last month and Rs 7,624 crore in September, data with the depositories showed. Prior to these outflows, Foreign Portfolio Investors (FPIs) were net buyers in August to the tune of Rs 51,200 crore and nearly Rs 5,000 crore in July. However, foreign investors were net sellers in Indian equities for a straight nine-months period which started in October last year.

Ajit Mishra of Religare is optimistic regarding where the Indian equity market is heading. He says, “We’re gradually progressing toward the record high now. However, mixed signals from the global front are still keeping the momentum in check. Besides, we have not seen broad-based buying yet and participation from the index majors is also restricted. In such a scenario, sector selection and then cherry-picking the right stocks become critical.”

Regarding specific sectors, he adds, “With the banking index at a record high, we expect the positive tone to continue and the IT index also looks upbeat to regain some strength after a year-long corrective phase. Meanwhile, other sectors may continue to see mixed participation so align the positions accordingly.”