17 June 2024

Indian Equity Funds Show Double-Digit Gains Despite Recent Market Decline

3 min read

The BSE Sensex, the leading index of the Bombay Stock Exchange, has not reacted well to the loss of the absolute majority by Narendra Modi’s party-led coalition in the recent elections of the Indian subcontinent. This outcome forces the coalition to reach agreements with the opposition in the next legislative session. This Wednesday, the index closed with a 6% drop, a loss that has not significantly impacted the funds investing in Indian equities. This category has gained an average of 11.41% this year as of June 3rd, according to Morningstar data, with almost all vehicles offering double-digit returns.

Over the past decade, India has made a giant leap forward thanks to the economic policies implemented by Modi’s Bharatiya Janata Party (BJP). However, the party has also faced criticism for its extreme Hindu nationalism against the Muslim minority and certain setbacks in civil rights, which might have contributed to losing the majority in the lower house.

India’s economy received a significant boost post-pandemic, maintaining momentum through its role as an intermediary in geopolitical conflicts like the Ukraine war, importing Russian oil. This progress has brought India closer to the world’s leading powers, gaining investors’ favor with double-digit Sensex growth in recent years, only suffering a decline of less than 6% in 2022.

As a result, Indian equity funds have offered more than 10% annualized returns over ten years on average, with annualized returns of 13% over five and three years. Some vehicles are achieving over 20% gains in 2024, such as Jupiter India Select (23.79%) and Schroder ISF Indian Equity (20.34%).

Despite the initial investor reaction to sell—leading to the main index reducing annual gains to 2.17%—due to the challenges Modi might face in reaching agreements with the opposition to advance economic reforms, experts emphasize the potential of the Asian giant in the coming years.

“The election results in India are clearly a disappointment for investors compared to initial expectations. However, it is important to focus on the long term, and we do not anticipate significant political changes in Modi’s likely third term. India’s growth drivers remain centered on manufacturing, infrastructure, and consumption,” stated Franklin Templeton.

Kenneth Akintewe, head of Asian sovereign debt at abrdn, notes that the BJP’s early days in power were marked by coalition politics, yet they managed to push through key reforms. “There is a risk of slightly more populist policies, but fortunately, on the fiscal side, the starting point is a much stronger fiscal behavior than expected and a structurally stronger fiscal position that provides significant buffers, reinforced by larger transfers from the Reserve Bank of India to the government,” he pointed out.

Nick Payne, investment director of Jupiter AM’s global emerging markets equity strategy, insists that India’s potential remains intact despite the government’s loss of seats. “The final tally of 290 seats won by the BJP-led National Democratic Alliance (NDA) is less than expected but sufficient to allow the Modi-led coalition government to return to power. The results are disappointing, but in the long term, we believe the impact on India’s prospects should be minimal,” he emphasized.

Payne believes that “the scale and success of historic reforms and the ability to maintain focus and direction for the future will continue to drive India’s growth in the future.” He also assures that the continuity of the ruling party should allow the government’s reform agenda to continue, although with a shift towards greater immediate support for India’s rural population. “We invest in high-quality companies with strong competitive positions and significant growth opportunities that can benefit from the immense opportunity in India; a long-term opportunity that has not diminished today more than it was yesterday,” he reiterated.