How to invest in the Indian stock market

The volatility India’s stock market saw this past week showed just how notoriously bad financial markets are at assessing and pricing political risk accurately. But as shares in Mumbai and Delhi bounce back, is it time for you to invest in the world’s fifth-largest economy?

You wouldn’t be alone. Last year alone, overseas investors bought $21.7bn worth of Indian stocks, accounting for 55% of foreign purchases of equities in Asia, excluding Japan, according to data from HSBC (HSBA.L).

The benchmark BSE Sensex Index (^BSESN) is up 4% so far this year and the Nifty 50 (^NSEI) has pushed 13% higher in the past six months.

India is already the world’s most expensive major equity market, with a forward price-to-earnings ratio that is even higher than the technology-heavy US market.

“At the simplest level, India is both a low-cost manufacturing location and a rapidly developing source of demand. Perhaps, more significantly, India is also home to true centres of innovation in a number of fields,” said analysts at investment bank Bernstein.

However, with the result of India’s extended election triggering significant market volatility, whether its stock market will continue to outperform is a question on investors’ minds.

How did the election results affect the share market?

Prime minister Narendra Modi’s inability to secure a landslide victory in India’s recent general election knocked the country’s stock market, which had reached an all-time high prior to the results. However, share prices have since rebounded as investors perceive potential benefits in the electorate’s decision to limit the Bharatiya Janata Party (BJP) leader’s dominance as he embarks on his third term in office.

For the first time in a decade, Modi’s BJP failed to achieve a parliamentary majority on its own. The BJP won 240 seats, which, while short of a majority, still enabled the National Democratic Alliance (NDA) — the coalition led by the BJP — to secure 293 seats in total, surpassing the 272 seats required to form a government.

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In his two terms, Modi focused on improving India’s infrastructure and boosting domestic manufacturing, including in the defence sector. However, he also peddled a nationalist Hindu-first policy, severely undermining India’s secular ethos, freedoms and fundamental rights enshrined in India’s constitution.

Shares of top defence, infrastructure and capital goods companies have risen between 64% and 480% over the last 12 months.

“Investors had been betting on a clear win for incumbent prime minister Modi and a continuation of his investment-led agenda, driving Indian shares up ahead of polling day. The closer-than-expected result has triggered a whipsaw reaction in Indian markets as those plans were thrown into uncertainty,” Ed Monk, associate director at Fidelity International, said.

Read more: Global money has started tiptoeing back into Indian equities

“Heading into the election period, India’s shares were among the world’s most expensive. The Nifty 50 index was trading on a multiple of expected earnings above 20, on a par with the tech-fuelled US market. While many investors have been concerned about India’s high rating, the market has enjoyed plenty of momentum from both domestic and overseas buyers,” he added.

Investors have been mostly favourable towards Modi’s economic agenda throughout his decade-long tenure.

The primary catalyst for the surge in India’s stock market in recent years has been strong earnings growth. Last year, corporate profits increased by 20%, in line with the rise in the Nifty 50 index. In the first quarter of 2024, profits were 16% higher compared to the same period the previous year, according to Goldman Sachs.

The bank forecasts a 15% growth in profits for both this year and the next. This earnings growth is expected to support the market even at its currently high valuation multiples.

“[Last] week’s election results have been a stark reminder of the unpredictability of polls and market reactions. In India, exit polls at the weekend suggested Modi was on course to increase his majority, driving markets higher. However, the result was the opposite, with a coalition government now on the cards, prompting a steep drop in the Sensex,” Lindsay James, investment strategist at Quilter Investors, said.

“High valuations may mean that polling errors of this magnitude are taken as more of a bad surprise than a good one, but a coalition may temper the political extremes and provide economic stability – ultimately no bad thing,” she added.

As investors anticipate new policies and reforms, several sectors are positioned for potential growth.

Tata Group: neutrality amid volatility

Tata Group, one of India’s largest conglomerates and a key player in the country’s growth story, maintained a stance of political neutrality with only a tweet from industrialist Ratan Tata urging people to go out and vote responsibly.

Stocks across the group have climbed in the election aftermath, with companies like Tata Motors (TATAMOTORS.NS), Tata Motors DVR (TATAMTRDVR.NS) and Tata Chemicals (TATACHEM.NS) all pushing between 1% and 2%.

Founded in 1868 by Jamsetji Tata, the Tata Group has a significant presence in numerous industries, including steel, automotive, IT, telecommunications and consumer goods.

Under the leadership of successive generations, the group expanded its footprint across multiple sectors.

Tata established Tata Motors, which later launched India’s first car, the Tata Indica. Under Ratan Tata, who led the group from 1991 to 2012, the group made acquisitions like Tetley by Tata Tea, Corus by Tata Steel, and Jaguar Land Rover by Tata Motors, transforming Tata into an international conglomerate. The group currently employs over 935,000 in more than 100 countries across six continents.

Headquartered in India, it is comprised of 30 companies across ten verticals.

Major companies owned by Tata Group include:

• Tata Steel (TATASTEEL.NS): One of the world’s largest steel manufacturers.

• Tata Motors (TATAMOTORS.NS): A leading automotive manufacturer, known for passenger cars, trucks and defence vehicles.

• Tata Consultancy Services (TCS.NS): A global leader in IT services, consulting and business solutions.

• Tata Power (TATAPOWER.NS): India’s largest integrated power company.

• Tata Chemicals (TATACHEM.BO): A specialist in chemicals, crop protection and consumer products.

• Tata Consumer Products (TATACONSUM.BO): Includes brands like Tata Tea and Tata Salt.

• Titan Company (TITAN.BO): Known for watches, jewellery (Tanishq) and eyewear.

• Tata Communications (TATACOMM.BO): Provides telecommunication solutions globally.

• Taj Hotels (TAJGVK.NS): A chain of luxury hotels and resorts.

• Tata Technologies (TATATECH.NS): The newest of Tata companies to go public, operates as a product engineering and digital services company with operations in North America, Europe and Asia Pacific.

• Tata Investment Corp (TATAINVEST.NS): A non-banking financial company, primarily involved in investing in long-term investments, such as equity shares and equity-related securities.

The Tata Group is also known for its commitment to social responsibility, with 60% of its shares held by philanthropic trusts. These trusts support various initiatives in education, healthcare and rural development, following the group’s ethos of contributing to the nation’s growth beyond business.

Analysts see Tata Group as a good bet for those looking for diversified exposure to various industries with a reputable and well-established conglomerate.

Read more: Modi’s key ally-linked stocks are surprise winners in India

Tata has a reputation for ethical business practices and strong corporate governance, which can be reassuring for investors. However, the performance of several Tata companies is tied to economic conditions in India and there is still uncertainty over how Modi will deliver his third mandate.

Tata pioneers chipmaking in India

In February, Tata Electronics announced it’s entering the semiconductor sector and chipmaking after its proposal to build a mega semiconductor fabrication facility (Fab) in Dholera, Gujarat – Modi’s home state – was approved by the government of India. It will build the ‘AI-enabled’ Fab in partnership with Taiwan’s Powerchip Semiconductor Manufacturing Corporation (PSMC) and the construction will begin this year with a total investment of $11bn.

N Chandrasekaran, chairman of Tata Sons, said at the time: “Tata Group has a tradition of pioneering many sectors in the country and we are confident that our entry in semiconductor fabrication will add to this legacy.”

The Tata Fab will have a manufacturing capacity of up to 50,000 wafers per month. It will make chips for applications such as power management IC, display drivers, microcontrollers (MCU) and high-performance computing logic, addressing the growing demand in markets such as automotive, computing and data storage, wireless communication and artificial intelligence.

Top stocks to watch after India’s election

Shares of defence, infrastructure, railway and capital goods companies will get a boost after Modi’s win, the head of brokerage Motilal Oswal Financial Services said.

“These were areas where the government has focused on and invested money. High probability that the ruling government will continue. If they return… they’ll go (with) much more vigour,” Raamdeo Agrawal, chairman and co-founder of the brokerage, told Reuters.

Meanwhile, Motilal Oswal suggests that investors should focus on specific sectors and companies when considering their investments. They recommend looking at financial companies, consumer goods companies, industrial companies and real estate companies. Below are their top investment picks divided into large caps and midcaps:

Large-cap picks:

Mid-cap picks:

These companies are considered attractive investment opportunities by Motilal Oswal due to their strong market positions and potential for growth.

Brokerage firm PhillipCapital has identified 12 stock picks with strong one-year growth potential for investors aiming to position their portfolios strategically ahead of the election results. These stock picks span various sectors, offering a diversified approach to potential investment opportunities. The selected stocks are:

1. State Bank of India (SBIN.NS)

2. Bank of Baroda (BANKBARODA.NS)

3. Canara Bank (CANBK.NS)

4. Power Finance Corporation (PFC.BO)

5. Rural Electrification Corporation (RECLTD.BO)

6. Shriram Finance (SHRIRAMFIN.BO)

7. Muthoot Finance (MUTHOOTFIN.BO)

8. UltraTech Cement (ULTRACEMCO.NS)

9. Siemens (SIEMENS.BO)

10. Hero MotoCorp (HEROMOTOCO.BO)

11. TVS Motor (TVSMOTOR.BO)

12. Divi’s Laboratories (DIVISLAB.NS)

These companies are seen as having robust growth prospects in the upcoming year, making them attractive options for investors looking to optimise their portfolios.

Read more: Top Asia currency trade risks tripping up market if rupee swings

Broker 5paisa has listed the top sectors set to benefit from Modi’s third term:

However, investing in individual shares in India takes some serious legwork if you are an outsider.

Investing as a foreigner or NRI in India

To invest in shares of India’s listed companies, foreign investors have to use the foreign portfolio investment (FPI) route. Investors, whether individuals or firms, need to be registered with the country’s markets regulator and abide by its disclosure requirements. Most of the 10,800 FPIs are funds.

Non-resident Indians (NRI) can invest in the Indian stock market through the portfolio investment scheme and transactions are routed through a non-resident ordinary (NRO) savings account. The overall investment limit for NRIs and any person of Indian origin (PIO) in stocks is 10% of the company’s paid-up capital. Individual investment is capped at 5%.

NRIs cannot engage in intra-day trading, they have to take delivery of shares and can’t trade derivatives.

Investment options for UK Investors

For UK investors, funds and investment trusts might be the most sensible option to capitalise on the Indian stock market, which has overtaken Hong Kong as the fourth largest in the world.

These provide diversified exposure to Indian markets and are managed by professional fund managers. Some popular options include:

• JPMorgan Indian Investment Trust (JII.L): This trust aims to provide long-term capital growth by investing in a diversified portfolio of Indian equities.

• Aberdeen New India Investment Trust (ANII.L): Focuses on long-term capital growth through investments in Indian companies, leveraging Aberdeen’s expertise in Asian markets.

• Franklin India Fund (0P0000W9XO.L): A mutual fund that invests in a broad range of Indian equities across various sectors.

• iShares MSCI India ETF (INDA): An exchange-traded fund that tracks the performance of the MSCI India Index, providing broad exposure to Indian large- and mid-cap companies.

• Jupiter India Fund (0P0001JKIB.L) – A diverse fund with 82 holdings spread across the financial services, healthcare, consumer, energy and industrial sectors.

By choosing these investment vehicles, UK investors can participate in India’s growth while mitigating some of the complexities and risks associated with direct investments in foreign stocks.

Watch: Investors seek policy clarity after India election

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