Despite the rally in equities over the last few years, India, according to Christopher Wood, global head of equity strategy at Jefferies, is still in early stages of an equity cult.
Any changes to the capital gains tax for equities – both long-term and short-term – in Budget 2024 scheduled to be announced on July 23, he believes, can trigger a bigger correction that what the markets witnessed post the Lok Sabha election outcome on June 4 that saw the Bharatiya Janata Party (BJP) lose majority, though it was able to form the government with the help of coalition partners.
His conviction on the road ahead for the Indian stock markets stems from the rising participation of retail investors over the years, including in mutual funds, which Wood believes, is likely to continue.
The Indian stock market, he said, remains far the most promising asset management story globally, even in the face of loss of majority for the BJP in the general elections earlier this year.
“Remember that the stock market only corrected for one day and is now up by 13.3 per cent since then (June 4).
"This has served to highlight only further the power of the retail investor phenomenon in the sense that retail investors bought as the professionals sold, and so far the retail investors look right,” Wood wrote in his weekly note to investors, GREED & fear.
Rising ownership
Retail investors and mutual funds’ ownership of stocks, meanwhile, has risen from 16.6 per cent at the end of fiscal 2020-21 (FY21) to 18.4 per cent at the end of FY24 ended March 2024. FII ownership of Indian stocks, on the other hand, has declined from 22.1 per cent to 19.9 per cent over the same period.
“All this means the nature of the Indian market has fundamentally changed in terms of the extent to which it has become domestically driven.
"In GREED & fear’s view the base case is that India remains in the early stages of the growth of what could be termed the cult of equity,” Wood said.
The Indian stock market is now capitalised at $5.2 trillion, up 296 per cent from the low of $1.3 trillion reached in March 2020, and accounts for 1.96 per cent of MSCI AC World Index, up from 0.93 per cent at the end of March 2020.
“While stock market capitalisation is now 145 per cent of GDP, up from 52 per cent in March 2020, is no longer cheap, it is not a reason to sell, save from the most short-term or tactical of standpoints.
"GREED & fear still has a 26 per cent weighting in India in GREED & fear’s global long-only equity portfolio.
"Yet most global equity funds, as opposed to global emerging market funds, have barely invested in India,” Wood said.
Budget 2024: Watch for populism
The Budget 2024 on July 23 is to be watched for any signs of populism, Wood said, in order to meet the demands of the two minority parties in the BJP coalition.
He, however, suggests that the budgetary allocation to meet such demands will be less than what is feared.
“There seems to be less concern than was the case before about a potential increase in the capital gains tax rate.
"The view is that the re-elected government is unlikely to make such a move because of the reduced mandate.
"Still if that view turns out to be wrong, and the capital gains tax is increased materially, it will likely trigger a bigger correction than what occurred post the election,” Wood added.
Another interesting point, he believes, is the growing confidence of domestic investors in the long-term stability of the rupee.
A stable to rising rupee, Wood said, would certainly only enhance the long-term argument for investing in Indian equities which remain, first and foremost, a domestic demand-driven story.
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