Foreign investors have poured $15 billion into the Indian stock market, according to the Securities and Exchange Board of India. The India equity benchmark NIFTY 50 is at a record high, having closed at 20,855.10 on Dec. 5, up 14.6% year-to-date.
A recent study found that nearly 40% of global pension and sovereign wealth funds view India as the most attractive emerging market, according to London-based think-tank Official Monetary and Financial Institutions Forum.
Investment managers generally agreed that stock pickers can find opportunity in small- and midcap firms at attractive valuations.
"In any economy, most of the economic growth, most of the innovation gets driven by small and mid caps," said Rich Nuzum, executive director for investments and global chief investment strategist at Mercer, in an interview.
"Once a company gets big, it tends to attract disruption from below, from emulators. It tends to diversify its portfolio as opposed to sticking to its knitting, and there's lots of academic and governance research about why that's a bad idea. And then it may drive government disruption," said Nuzum, who is based in New York.
Mercer has $16.45 trillion in assets under advisement and $379 billion in assets under management.
Generally, India's economic growth post-pandemic has been good, particularly for the listed space, and the growth of small firms has been even better, said Ruchit Mehta, head of research at SBI Funds Management, the $100 billion joint venture between State Bank of India, India's largest bank, and European asset manager Amundi Asset Management.
"Obviously, because you're smaller in size, you have the ability to grow faster, capital was available, demand was good and consequently there was a solid earnings momentum come through in the mid and small caps. That coincided with a fairly decent stock market rally," added Mehta, who is based in Mumbai.
That said, institutional investors have shown interest in large-caps stocks, but largely through passive investments. However, Mehta said that given current valuations and market conditions, investors will find more opportunity through active investing in large-cap strategies.
"One of the challenges of passive strategies is that it just buys what's there in the market; it doesn't distinguish between a good company and a bad company, liquid vs. illiquid. I think because large caps have underperformed relative to mid and small caps, we are quite optimistic about (active investing in) the large-cap area," he said.
There is a misconception by institutional investors that they can get India exposure through an Asia or emerging markets fund, said Vinay Agarwal, Singapore-based director and the lead fund manager of Indian equities at FSSA Investment Managers, in an interview.
"I think that is where they are wrong. The exposure they get via all these regional funds is a few banks, a few IT services companies, maybe a big auto company or a big consumer company, but that's not what India is all about. That's not where Indian growth will be over the next 10, 20 years," he said. He added that as small- and midcap stocks draw more interest, they have become more expensive, currently "almost at historical highs as compared to the large caps."
"Having said that, there will still be opportunities, for example, the market leaders in the air conditioner market in India are still small caps," he said. "These are companies that are valued at $2 billion and $3 billion today. Are they expensive on near-term earnings? Yes. But is there an opportunity for these companies to become several times bigger over the coming decades? Yes."
FSSA Investment Managers does not disclose its assets under management. a spokesperson said. The firm is a part of First Sentier Investors, which managed $137.8 billion in assets as of Sept. 30.