The deserted Bombay Stock Exchange building is pictured as the Sensex went down after a lockdown in the wake of the start of the novel coronavirus pandemic, in Mumbai on March 23, 2020. Photo: The Times Of India

Sensex and Nifty, India’s key stock indexes, closed at record highs on Saturday, the first day of Samvat 2077. Both global and local investors are optimistic about getting decent returns in Asia’s third-largest economy after China and Japan.

Global investors have poured $10.66 billion into local equities since January, with $4.2 billion coming in November so far. At this rate, foreign portfolio investments could surpass the $14.37 billion recorded in 2019, and reach the highest point since 2014.

Many observers are intrigued by the fact that so much foreign money is flowing into an economy that is embattled on several fronts.

The gross domestic product contracted 23.9% in the June quarter, and is predicted to contract in the September quarter as well, and close the financial year with nearly a double-digit contraction. The central bank earlier this month said that with two successive quarters of contraction, India has entered into a “technical recession.”

Part of the reason for the economic slowdown is the Covid-19 pandemic, which forced the government to impose a two-month countrywide lockdown, and several states to impose sporadic lockdowns, disrupting production and supply chains. India is still the second-worst-affected country with 8.88 million cases, behind the US’s 11.55 million cases.

The Indian economy was already grinding down before the pandemic – from 7.9% in 2016 to 4.2% in the year to March 2020. On Sunday, India missed a historic opportunity to be part of the world’s largest trade agreement, which offered the potential to boost its trade volumes, growth and standard of living.

The members of the Regional Comprehensive Economic Partnership (RCEP) are China, Japan, South Korea, Australia and New Zealand and the 10 ASEAN nations.

To make matters worse, the Chinese army has been occupying several parts of India’s northern Ladakh region since its incursions in May. Troops of both the countries are facing off in freezing high-altitude mountains supported by artillery, tanks, and fighter jets, which drains resources India can ill-afford to spare.

Investor excitement

So what is it about Indian equities that is exciting investors?

The first reaction of fund managers was to say, “It’s a case of irrational exuberance,” and that after the sharp dip between March and June, investors see only the upside as production and sales increase and there has been positive Covid-19 vaccine news. Cheap global and local funds are also finding their way into stocks, lifting share prices.

A lack of other attractive investment avenues is also pushing investors into equities. The government and central bank have pushed down interest rates to foster a revival of investment, but that’s made bonds and bank deposits less attractive. Investment in gold, silver or land is not as liquid, and real estate prices are yet to recover.

Today, the 50-stock Nifty index closed at 12,874.20 points after rising to 12,934.05 while the 30-stock Sensex closed at 43,952.71 after rising as high as 44,161.16.

Companies in the chemicals, information technology and pharmaceuticals sectors are gaining from India’s unique cost advantages compared with other countries.

“The domestic macro recovery is underway as suggested by pick up in high-frequency activity data points. Consequently, our economists expect growth momentum to continue with real GDP growth rebounding strongly to 10% and 7.2% year-on-year over the next two years (compared with an expected -9% this calendar year),’’ said Goldman Sachs’ Portfolio Strategy Research report.

As the economy recovers from the pandemic-induced contraction, we expect corporate profits to rebound 27% next year and a further 21% in 2022, after an expected decline of 11% year-on-year this year, according to the Goldman report dated November 11.

Morgan Stanley forecasts that the Indian economy will grow 9.8% in 2021 and 6% in 2022 after contracting 5.7% in 2020. Consumer demand in India, as in most emerging economies, is leading the current growth.

Automobile companies are showing a pickup in sales, though opinions remain divided on whether the sales are from demand held back by the lockdown or constitute fresh demand. Companies providing telecom services are also net gainers as consumers are forced to shift to digital technology for making online purchases or banking and other financial transactions when they are confined to their homes.

About 40% of the increase in the Nifty over the past month came from a rise in banking stocks, Shankar Sharma, vice chairman of First Global, a global securities house, said in a television interview. According to Motilal Oswal, a securities firm, in October Indian markets gained 4%, compared with Indonesia 5%, the US -3%, UK -5%, Russia -9%, and South Korea -3%.

A large part of the rises in the Nifty and Sensex indexes has been due to between a dozen or two large stocks increasing in value. Brokerage PhillipCapital (India) sees the rally spreading to mid-caps and small-cap stocks as economic growth picks up.

A large part of the rally over the past few weeks has also been due to reports of pharmaceutical companies in various countries making positive Covid-19 vaccine announcements. India, which is home to a comparatively high percentage of young people, is likely to require the vaccine mainly for its most vulnerable groups such as frontline medical workers and the elderly.

“Indian equities are most positively sensitive to the improving prospects of a vaccine, and so we expect a ‘catch-up’ laggard rally given the positive news flow on the vaccine front (which could spur faster than expected recovery),” the Goldman report said.

Still, the naysayers remain skeptical as they don’t see any significant pickup in borrowing from banks for working capital and an increase in investments for the creation of capital, which would be the key to any fundamental pickup and sustainability in growth. Investors may be betting on India’s basic strengths and its future potential.