India's stock market has achieved a significant milestone, surpassing a market value of $4 trillion for the first time. This achievement has placed India in close competition with Hong Kong for the fourth spot in the global ranking. The S&P BSE Sensex IN:1, which serves as India's benchmark equity index, has experienced a remarkable increase of over 7% in the past month and a substantial gain of 14.3% for the year-to-date. This surge is driven by investors seeking exposure to India, the world's most populous nation and fifth largest economy.

A Comparison of Performance

While the MSCI China index has witnessed a decline of 13.6% in dollar terms, and the MSCI World Index has grown by 16.1% during the same period, the S&P 500 in the U.S. has enjoyed a remarkable 18.5% gain. The iShares MSCI India ETF INDA has also seen an impressive climb of 13.4% this year.

A Decade of Success

The Sensex has experienced an exceptional decade, reaching a new all-time high in nine out of the past ten years. In total, this benchmark index has achieved a record-breaking milestone 243 times. Such consistent growth has positioned India's market as one to watch.

India vs. Other Global Markets

Although India's market falls behind the United States (which is approximately ten times larger), China, and Japan in size, it maintains a comparable valuation to that of Hong Kong. However, Hong Kong has recently faced challenges due to concerns regarding the mainland China property sector.

Driving Factors Behind India's Success

India's market has experienced a boost from the increasing number of investors within its 1.4 billion population. Additionally, foreign buyers have contributed to this success by purchasing a net $15 billion worth of stocks in 2023, as reported by Bloomberg data.

Investors have been drawn to India due to the open-market and business-friendly policies implemented by Prime Minister Narendra Modi. With expectations for Prime Minister Modi to retain power after the 2024 election, this sentiment is likely to continue. Furthermore, investors are enthralled by India's thriving economy, which achieved a growth rate of 7.6% in the three months leading up to September.

India's stock market has proven its resilience and growth potential, positioning itself as a favorable investment destination for both domestic and foreign investors alike.

The Close Relationship Between Economic Growth and Market Returns in India

According to Alex Wolf, Asia head of investment strategy at J.P. Morgan Private Bank, data over the past twenty years clearly demonstrates that India has one of the closest relationships between economic growth and market returns.

India's economy is expected to continue its rapid expansion and could account for about 16% of global growth by next year. This growth can be attributed to several factors, including increasing employment opportunities, relatively low wages, and a large proportion of English speakers that attract foreign direct investment.

Gargi Pal Chaudhuri, head of iShares investment strategy at BlackRock, highlights that with a labor force participation rate of only 32.5%, the Indian economy has immense potential for further growth as millions of people join the formal labor force. This will solidify the Indian consumer base and contribute significantly to economic growth.

Another major advantage for India is the shift by many manufacturing companies to reduce their exposure to China due to perceived geopolitical risks. Companies like Apple and Foxconn are already taking steps to move some of their operations to India. Apple is planning to switch battery manufacturing to India, and Foxconn intends to invest over $1.5 billion in a new production facility in India.

Gargi Pal Chaudhuri from BlackRock also points out that India stands to benefit from the trend of trade rewiring to "friendlier" countries with lower costs compared to developed markets. India is actively expanding its role in global supply chains, making it an attractive option for companies looking for alternative manufacturing bases.

However, investors should note that the surge in Indian stocks has led to higher valuations compared to historical levels. The 12-month forward price/earnings ratio currently stands at over 20 times. While this indicates positive market sentiment, it also presents a potential risk for investors considering entry into the Indian market.

In conclusion, India's close relationship between economic growth and market returns presents significant investment opportunities. With favorable factors like a growing labor force, increasing foreign direct investment, and the shift of manufacturing operations away from China, India is well-positioned to continue its impressive economic expansion. However, investors should carefully consider the valuation levels before making investment decisions.

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