Indian multi-asset portfolio allocation

Can India remain best in class this year?

02 February 2024

Narayan Shroff, India, Director-Investments

Please note: All data referenced in this article are sourced from Bloomberg unless otherwise stated, and are accurate at the time of publishing.

Key points

  • India’s economy outpaced its global peers in 2023, with anticipated annual growth of around 7% – well above China, which struggled to reach its 5% growth target
  • Despite worrying geopolitical concerns, strong domestic inflows and positive market sentiment suggest an imminent sell-off in Indian equities is unlikely
  • The government’s interim budget was well received by bond investors – with an outperforming economy, favourable demand-supply local debt dynamics and controlled issuance pressure likely to support prices
  • With a strong economy and healthy corporate finances, some investors may want to consider diversifying. Options could include exploring alternative asset classes like private equity, private credit or holding gold, which can act as a sensible diversifier during periods of heightened geopolitical tensions

The pace and size of anticipated rate cuts around the world is likely to be a key driver for financial markets in 2024. With the US Federal Reserve (Fed) holding fire at its January policy meeting, the economy being on course for a ‘soft’ landing and inflation heading towards target, the central bank seems unlikely to fire the rate-cutting gun until May at the earliest. 

Closer to home, India had a strong 2023, with economic growth expected to be around 7%, head and shoulders above the performance of other large economies. By contrast, China’s post-pandemic rebound disappointed last year, with the economy struggling to reach its 5% growth target. 

Growth expectations help to set the mood music for global investment flows. As businesses and investors look to diversify away from Chinese exposure in Asia, India has become a popular alternative location. Prospects for the country are encouraging, with the interim budget on 1 February hinting at keeping up the pace of fiscal consolidation and a focus on capital expenditure initiatives to help support expansion. 

Domestic cyclical growth stocks flavour of the month

We moved to an overweight position in Indian equities during December. Flows into the asset class should hold up this year, with little to doubt that the recent positive market momentum can be retained. For all the worrying geopolitical noise at the moment, a sharp sell-off in the market looks unlikely in the short term.  

Growth in corporate earnings in the next fiscal year is likely to remain in the 12-14% range for so-called Nifty 50 stocks, on the back of recent upbeat growth data. Arguably, the valuation premium for Indian equities should remain attractive due to the economy’s relatively strong performance against other Asian peers, Europe and the US. With little signs of irrational exuberance among investors in the country, and the domestic volatility index subdued, market sentiment is well balanced.

Large-cap valuations remain appealing as earnings growth has not been fully priced and foreign flows can add to the potential upside for such stocks. Elsewhere, mid- and small-cap valuations might seem rich, but are well supported by strong earnings growth.  

With the government committed to boosting private capital expenditure this year, domestic cyclical growth themes are one way to play this theme, with a preference for sectors like power, manufacturing, infrastructure, capital goods and select consumer discretionary segments. 

Budget goes down well with debt market 

The interim union budget held on 1 February, ahead of elections to be held in April and May, seems to have gone down well with domestic bond markets. The estimated fiscal deficit, at 5.1% of gross domestic product (GDP), gross central borrowing of 14.13 trillion rupees and net central borrowing of 11.75 trillion rupees were less than the market had expected.

The interim budget has had little immediate effect on domestic markets. Bond markets are now likely to focus on incoming global and domestic input data, inflation (which is expected to trend down despite risks from higher food costs, crude oil prices and tighter market liquidity) and the latest geopolitical developments. As such, the central bank seems unlikely to cut rates until summer at the earliest. 

The healthy macroeconomic data and favourable demand-supply dynamics for Indian government bonds, supported by controlled issuance pressure, are likely to support prices. Additionally, the strong economy and improving corporate balance sheets are a positive for AA- and A-rated credit, which offer attractive yields. 

Broadly speaking, there is a strong case to add duration to Indian bond portfolios with a medium-to-long-term investment horizon (18-24 months).

Private credit in demand 

Private credit tends to perform well when the economy is humming and corporate balance sheets are healthy, as is currently the case in India. Within this segment, private credit backed by real estate seems to have promising prospects, aided by an upturn in the real estate sector. 

Gold as a diversifier

We continue to view gold as a key portfolio diversifier. The meaningful disconnect between real yields and gold prices (both on the up, while being negatively correlated) is in large part due to emerging-market central banks rebalancing their holdings away from US-linked securities, like Treasuries or the dollar.  

That said, more volatility could be seen for gold prices in coming months, if geopolitical tensions ease. However, over longer time horizons, it may still be worthwhile having exposure to this precious metal as a portfolio diversifier.


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