- India's stock market questions the sustainability of its medium-term growth potential
- Investors worry AI could disrupt India's services export competitive advantage
- Demographic shifts raise concerns if India can grow wealthy before population ages
India's stock market is grappling with a concern that goes beyond near-term corporate earnings: whether the country's growth story can sustain itself over the medium to long term. While the economy has remained resilient and corporate earnings have largely exceeded consensus expectations, benchmark indices have struggled to reflect the strength of the underlying macroeconomic environment.
Ridham Desai, Morgan Stanley's India equity strategist, told NDTV Profit that investors are increasingly questioning India's medium-term growth potential, particularly its ability to sustain earnings growth over the coming years. According to Desai, the concern is not necessarily about the earnings growth companies are delivering today, but whether that growth can continue for long enough to justify the premium valuations commanded by Indian equities.
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"I don't think the market on the aggregate is fully convinced that the earnings growth India is currently delivering is sustainable for the years ahead," Desai said.
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He explained that this uncertainty affects what investors call terminal growth, which accounts for a significant portion of a company's or market's equity value. In other words, valuations are determined not just by earnings over the next two years but also by the growth investors expect over the longer term. This is one reason why Indian equities have historically commanded higher valuations than markets such as China and South Korea, where expectations of long-term economic growth have been relatively weaker.
Can India Sustain Its Long-Term Growth Advantage?
Desai identified two possible sources of concern behind the market's growing scepticism about India's long-term prospects. One is the potential disruption from artificial intelligence (AI). Investors are increasingly worried that AI could undermine India's competitive advantage in exporting services, an important source of foreign exchange earnings and favourable terms of trade for the country.
India has built a strong position in the global services market, particularly through its information technology and outsourcing industries. However, if AI significantly changes how these services are delivered, investors could begin reassessing India's long-term competitive advantage.
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The second concern relates to India's demographic transition and whether the country can become wealthy before its population ages. Desai raised the question of whether India's fertility rate has declined to a level that makes the country's development journey more urgent.
"Does India become rich before it becomes older?" he asked, warning that the country could risk remaining a middle-income economy if it fails to accelerate its development. He believes this debate around India's long-term growth potential will remain relevant for investors.
India Is Losing Its Earnings Growth Advantage
Beyond these structural concerns, Desai highlighted a more immediate problem: India's earnings growth is currently trailing that of several competing global markets. He pointed out that markets such as Japan, Taiwan, South Korea, China, the US and Germany are delivering stronger earnings growth than India.
This marks a departure from the historical trend, when Indian companies typically delivered superior earnings growth during global economic upcycles.
Desai noted that the current global environment has remained relatively resilient despite challenges such as elevated US bond yields and persistent inflation. These pressures are not unique to India, yet equity markets in several other countries have continued to perform relatively well. India, meanwhile, has struggled to translate its economic resilience into stronger stock market performance.
Interestingly, Desai also pointed out that markets such as South Korea and China have entered bear-market territory, highlighting how global market leadership and investor preferences can change quickly. He added that Indian earnings growth needs to accelerate to restore the country's relative advantage.
However, one distinction is that earnings growth in India is spread across a wider range of sectors, whereas growth in several other markets is more concentrated in a smaller number of industries and companies.
Why Is The Market Not Reflecting India's Economic Strength?
Desai described the disconnect between India's macroeconomic performance and stock market behaviour as unusual.
"The economy is doing better than expected. Corporate earnings were actually slightly better than expected, at least as far as consensus is concerned, and continue to do remarkably well," he said.
Yet the Nifty has continued to languish, creating an unusual situation in which economic indicators are performing better than the stock market. Desai said that in his 35 years of experience in financial markets, he had often seen situations where markets remained optimistic even when the broader economy failed to support that optimism. The current situation is almost the reverse.
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He also cited geopolitical uncertainty in the Middle East and delays in the India-US trade deal as factors that have kept investors on edge. Despite these challenges, he believes some inflection in markets may already be underway.
Opportunities Remain Despite Market Weakness
Despite the concerns surrounding valuations and relative earnings growth, Desai believes there are substantial opportunities in the Indian stock market. He said several stocks are now trading at attractive valuations, suggesting that investors should not overlook the opportunities emerging from the ongoing market weakness.
"There are many cheap stocks in the stock market now. Too much opportunity in the market," he said.
Desai also identified the consumer sector as an area that looks particularly strong, pointing to signs that the broader economy is flourishing.
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