Indian stock market outlook: the place to be in 2022

A huge population of young workers could turn India into the new China. Our overseas investing expert shares his thoughts on investment prospects in the subcontinent.

Just as, 30 years ago, China was seen as a sleeping giant waiting to leap from the 19th to 21st centuries, India watchers have been waiting for the same thing to happen in South Asia. Just as in China, it is taking time to mobilise a large, mainly working-age population to generate the kind of middle-class prosperity that feeds on itself. That time may at last be here for the world’s second-largest population.

Certainly, returns on funds that specialise in investing in India and the subcontinent have shown extremely good returns over 2021. Given that most investors sensibly prefer this route into India rather than trying to pick individual companies for themselves, this is encouraging news, though as always it is wise to remember that this year’s performance may not be repeated in 2022.

Ashoka India Equity (LSE:AIE) and India Capital Growth (LSE:IGC) have both seen their share prices rise by 60% over the past year, while Aberdeen New India (LSE:ANII) has added more than 30%. The MSCI India Index has gained around 26% this year, one of the top two performances by any stock market index anywhere.

The current Indian government of Narendra Modi is not without its critics. His right-wing Bharatiya Janata Party is staunchly Hindu and has been accused of deliberately fermenting religious tension with Muslims, but it has won two consecutive general elections, in 2014 and 2019, which at least brings some sense of stability and continuity, so investors know where they stand.

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At least there is a greater sense of law and order than is found in many developing nations to offer some comfort to foreign investors. For instance, earlier this year the Indian government decided to amend its tax laws to settle disputes with companies, including Cairn Energy and Vodafone (LSE:VOD) dating back to 2014 rather than insist on enforcing retrospective legislation.

Modi has tried to attract foreign investment in India, partly by improving efficiency in the bureaucracy to reduce a major stumbling block to businesses trying to get anything done. More controversially, he has reduced spending on healthcare and social welfare to encourage a spirit of self-reliance that will appeal to overseas investors.

India is a major producer of Covid-19 vaccines and, although most have been exported to richer nations, there has been a better inoculation programme than in most areas of the world outside North America and Europe. 

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However, to power its economic expansion, India is caught in a dilemma. Like China, it needs polluting coal-fired power stations to fuel the economic growth that raises the living standards of its 1.3 billion people. Also like China, it is suffocating its own citizens in clouds of smog.

The air in Delhi is reckoned to be the most polluted in the world, even worse than the smog that rolls down the Pearl valley from Canton to smother Hong Kong. Nor is there any escape indoors in Delhi. A University of Chicago study found that levels of particulates were actually worse indoors than outside. Pollution is estimated to contribute to the deaths of 1 million Indians every year.

This issue took centre stage at the COP26 conference in Glasgow in November, when countries such as India and China were accused of being major contributors to global warming. An unenforceable resolution to begin phasing out coal consumption was watered down further to phasing down coal-burning, leaving smog-creating nations looking like the bad guys.

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Investors have no need to worry about these shenanigans having an immediate adverse impact on India’s international reputation. All will be swept under the carpet for at least another 12 months, when the can could well be kicked further down the road. It is a harsh fact that what is bad for ordinary Indian citizens is good for investors who do not worry too much about ethical considerations.

Meanwhile, the volatility of earnings caused by the pandemic should ease going into the new year, thanks to the Covid-19 vaccination programme and state-backed loans to the worst-affected businesses. Although valuations of many Indian stocks are on the high side, greater visibility of earnings should justify these ratings. If investors continue to feel increasingly nervous about China as an investment destination, Indian could well be the place to be from here onwards.