India’s healthy economic growth has helped its stock market become the seventh largest market by size, with a market capitalisation (mcap) of $2.08 trillion. Its stock market has overtaken that of Germany, Europe’s largest economy, for the first time in seven years, according to Bloomberg. The US dominates the global ranking, with $27 trillion mcap, followed by China, Japan, Hong Kong, UK, France and India.
India’s economic growth will continue to propel mcap higher
India’s ascent reflects the growing clout of emerging markets. It also indicates its economy is positioned for sustained growth, even if the manufacturing sector is not firing on all cylinders. The BSE Sensex, the broad market benchmark, is up 5 percent in past one year in terms of local currency and down around four percent in US dollar terms, still outperforming MSCI Emerging Market index that declined 17 percent.
Mcap, which is the market value of listed firms, typically moves in tandem with economic growth. India’s mcap has room for improvement as India’s mcap-to-GDP ratio at 77 percent is not only below the world average but also below pre-global financial crisis levels of 151 percent. The mcap of Indian equities is likely to hit $6.7 trillion by 2027, according to Morgan Stanley.
Sectors/stocks likely to benefit
The most obvious beneficiary of growing mcap is the broking business. However, there are multiple challenges to the broking business, such as increasing competition, an emergence of low/zero cost brokers and falling broking yields. Further, the broking business is volatile which prompts us to look at relatively low-risk proxies for capital market growth which includes exchanges, depositories and asset management companies (AMCs).
Exchange – BSE
India is one of the world’s fastest growth engines with GDP likely to touch $5 trillion by 2025, which will be reflected in the performance of its stock markets. Indian exchanges, synonymous to equity markets, will continue to gain scale and depth. In an oligopolistic market, we see BSE as a beneficiary of buoyant capital market conditions. Hence, despite a being distant second in the equities segment, we expect BSE to continue on its growth path as the overall market size increases.
Depository – CDSL
The depository business is a proxy for the capital market in general and equities in particular. In a duopolistic market, CDSL is also expected to benefit from a rising mcap scenario. Booming capital markets generally mean higher trading volumes in the secondary market and it also boosts primary market activity. Both will boost transaction fees and revenues of CDSL.
AMCs – HDFC & Reliance Nippon
India’s asset management industry has seen growing inflows, as investors seek an indirect exposure to equities. Buoyant equity markets are expected to aid this trend of investing through mutual funds. While there are multiple growth drivers including “financialisation of savings” for AMCs inflows into mutual funds are highly contingent on the performance of equity markets. HDFC AMC and Reliance Nippon AMC (RNAM), being leading listed MF players, will continue to gain from the growth in India’s mcap. Both these AMCs are expected to see continued growth in their equity AUM and profitability.
These stocks (BSE, CDSL, HDFC AMC, RNAM) have corrected significantly from their 52-week high following broader market correction and due to stock-specific factors. For instance, AMC stocks corrected after SEBI capped the fees that AMCs can charge investors in September. As such, valuation has turned reasonable. There could be minor setbacks in short-term or quarterly performance. However, thanks to growing mcap, the long-term structural growth story of these stocks remain intact.