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A bronze bull statue is seen outside the Bombay Stock Exchange (BSE) building on Monday, June 3, 2024 in Mumbai, India. Indian stock futures rose in a landslide victory. Photographer: Dhiraj Singh/Bloomberg via Getty Images

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This report comes from this week’s CNBC “Inside India” newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big players behind its meteoric rise. Like what you see? You can subscribe here.

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Not long ago, India nifty 50 The index outperformed S&P 500 Index This year.

But since the sharp sell-off on August 5, U.S. stocks have gained 8%, leaving India’s benchmark index in the dust.

While the outperformance of U.S. equities can largely be attributed to the market’s realization that the U.S. economy remains strong, the lackluster performance of Indian equities is largely due to its failure to surprise investors positively.

First-quarter profits for Nifty 50 companies rose 3% from last year. Excluding banks and energy companies, other companies’ earnings per share rose 19% in the latest quarter compared with the same period last year.

However, the stock market is a forward-looking beast and the above is to be expected. In fact, of the 50 companies that make up the index, only 21 surprised investors. The rest simply couldn’t keep up.

Many analysts worry that it won’t be long before almost all markets fail to outperform expectations. Even if a few companies do this, it won’t have much of an impact on investors’ total returns.

“We believe underlying performance in autos, industrials, healthcare and information technology may not be enough to offset misses in financials, metals and energy,” said Amish Shah, equity strategist at Bank of America. “Additionally, global growth has Slowing down is also a risk.”

A possible slowdown in global economic growth could lead to lower commodity prices, which will not help India. But that’s unlikely to derail its growth trajectory.

The South Asian country’s economy is consumption-led, but exports have yet to become a dominant feature. However, lower oil prices due to the global economic slowdown could be beneficial as lower fuel prices help boost citizens’ discretionary spending.

Since the stock market is not representative of the Indian economy – energy accounts for a large portion of the Nifty 50 index and a relatively small share of GDP – any hit to oil and gas company earnings will lead to erratic returns for investors. Meanwhile, GDP growth is likely to continue.

Investors also have high forecasts for future growth. To meet expectations, Citi said earnings per share of Nifty 50 companies would need to grow at a compound annual rate of 13% over three years. It’s a tall order, but tepid compared with earlier, more frothy expectations.

“Earnings revisions, while still better than the long-term trend, have slowed from an upward revision trend and are now flat since July,” Citi India head of research Surendra Goyal said. “We see upside from current levels Limited – Buy on any dip.”

Should investors sell? Is it worth risking potential future profits?

A group of investors believe they may be able to solve this problem by turning to a more stable instrument: bonds.

Maximilian Macmillan, senior investment director at UK asset manager Abrdn, said: “Indian equities are enjoying strong price momentum and earnings growth but remain highly correlated and arguably dependent on the continued performance of U.S. equities in a late-cycle environment. “Bonds provide diversification from this primary and single source of performance, although they are not immune to risk. “

Data from the National Securities Depository Ltd. shows that so far in 2024, foreign capital inflows into Indian bonds have exceeded stocks.

Meanwhile, foreign investors have withdrawn from stocks every four months over the past two years.

Shumita Deveshwar, chief India economist at TS Lombard, said: “While stock market flows from foreign investors are volatile, India is attracting more foreign debt as its sovereign bonds are listed in global bond indices. inflow.

Apart from the inclusion of Indian government bonds in the J.P. Morgan Emerging Markets Index, which is one of the biggest drivers of fund flows, diversification in India-specific bond funds also plays a role.

Actively managed funds, e.g. Abledon‘sand Invescoof India bond funds offer yields well above 7%. ETFs from iShares, L&G and Xtrackers also make it possible to meet the growing demand for Indian government debt.

“They are one of the very few investment-grade asset classes that offer yields of around 7%, creating an excellent entry point for investors, especially unlike many other global bond markets, where their yields are higher than India’s 6.5% Policy rates, the latest inflation rate is 5.1%,” said Kenneth Akintewe, head of Asia debt at Abrdn.

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What happened to the market?

Indian stocks rose in tandem with global equities. this nifty 50 The index rose nearly 1% this week. The index has gained 14% this year.

India’s 10-year government bond benchmark yield has fallen to 6.85%.

Praveen Jagwani, chief executive of UTI International, told CNBC television this week that a good monsoon season would benefit the Indian market. “Indian markets tend to synchronize with the monsoon cycle,” he added.

Meanwhile, veteran emerging markets investor Mark Mobius said there will “definitely be a correction” in Indian stocks as the yen carry trade unwinds, but expects the bull market to resume soon.