India or America - Where Should Money Go Next?

Nifty 50 or Mag 7?

Author: Chris Wood

“Donald Trumps Death” was the cleverly written headline in the Times of India on 15 July (see The Times of India article: “Donald Trumps Death: Bullet pierces ear at rally; secret service kills shooter”, 15 July 2024).

The narrow escape does prompt the question of what would have been the financial markets’ reaction if the assassination attempt had succeeded.

It would not have been positive since it would have triggered a further extreme polarisation in America’s already highly polarised politics.

Meanwhile, the assassination attempt was also a reminder that the biggest risk to financial markets at present remains geopolitics.

Still it remains the case that the presidential election is still a long 72 days away and that is almost an eternity in politics.

It is also a long time for Donald Trump to exercise self-restraint.

But for now the best strategy for the Republican presidential candidate remains, even with his new younger opponent, to avoid divisive and polarising comments and focus on projecting a united Republican Party.

In this respect, it makes little sense to focus on the likes of Ukraine, an issue on which the party is divided in stark contrast to, say, illegal immigration.

In this respect, the Republican National Convention in July was a remarkable testimony to the extent to which Trump has taken over the party.

Where is the so-called Lincoln Group now?

Easing Will Start in September

Meanwhile, this writer remains of the view that recent political developments have removed the constraint on the Fed in terms of easing policy in the immediate months prior to the November election.

The base case remains that the Fed will ease in September, a view which is now consensus.

The Fed funds futures are discounting a 34bp cut in September and 103bp of easing by the end of 2024.

Narrow US Leadership Not a Good Sign

If rate cuts are seemingly  an obvious positive, the risk is clearly that growth slows materially in the US, including nominal growth, which would actually be equity market negative not positive.

In this respect, the narrowness of the US stock market rally in the recent past cannot be viewed as healthy, even if it is fundamentally driven in terms of the divergent earnings trends.

Nvidia has accounted for 26% of the 18.1% in gains recorded in the S&P500 year-to-date while the so-called Magnificent-7 stocks accounted for 50%, though down from 63% in 1H24.

Meanwhile the Magnificent-7’s trailing 12-month net income has risen by 64% since early 2023, while the trailing net income of the rest of the S&P500 constituents has declined by an estimated 3% over the same period.

India a Much Healthier Market Than the US

In this respect, the action in the booming Indian stock market has been fundamentally much healthier than America’s over the past year and more, in terms of a rally which has been broad-based and where stock gains have been led by small and medium-cap companies which have also enjoyed the best earnings growth.

Indian mid-cap stocks’ earnings rose by 46% last fiscal year ended 31 March, compared with 17% for the Nifty, the main benchmark index.

The Nifty MidSmallCap 400 Index has risen by 85% since the start of 2023, compared with a 37% gain in the Nifty.

As a result, the MidSmallCap index is trading at 28x one-year forward earnings, compared with 20.8x for the Nifty.

So, while Indian small and mid-cap valuations are certainly challenging, they have reflected superior earnings growth.

Domestic Indian Investors Are Driving the Rally

But they also reflect a stock market which continues to be boosted by surging domestic retail investor flows.

On this point, the flow numbers have continued to be dramatic, as reflected in the recently published data for July.

Domestic equity mutual fund net inflows have surged from Rs202bn in December to Rs450bn in June and Rs431bn in July, and are up from an average Rs156bn (US$1.9bn) per month in 2023 to Rs342bn (US$4.1bn) per month in the first seven months of 2024.

While total domestic retail inflows into Indian equities, including direct retail trading of stocks, mutual fund flows and flows via other sources, are estimated to be running at an average US$7.6bn per month year-to-date.

The result has been a marked increase in retail investor ownership of the stock market, including mutual funds, in the last three years.

Thus, retail investors and mutual funds’ ownership has risen from an estimated 16.6% at the end of FY21 to 18.4% at the end of FY24 ended 31 March.

Indeed retail investor ownership is now not so far off total FII ownership in terms of stocks owned by qualified foreign institutional investors.

FII ownership has declined from 22.1% to 19.9% over the same period.

So, the nature of the Indian market has fundamentally changed in terms of the extent to which it has become domestically driven.

Meanwhile, given India’s domestic driven bull run, it is worth highlighting some “big picture” numbers.

The stock market is capitalised at US$4.99tn, up 281% from the low of US$1.3tn reached in March 2020, and now accounts for 1.96% of MSCI AC World Index, up from 0.93% at the end of March 2020.

While stock market capitalisation is 140% of GDP, up from 52% in March 2020.