Investing in Indian Stocks: Opportunities and Risks

India's strong demographics and market structure make it a compelling investment, despite high valuations.

### Investing in Indian Stocks: Opportunities and Risks Explored
* 📈 Indian stocks have shown **impressive growth**, challenging US stocks, and this video discusses the **case for and against investing in them** while providing insights on **portfolio exposure**.
* 🌍 India’s large population presents a significant market potential, with a **dependency ratio of only 10%**, contrasting sharply with developed countries that face **rising dependency ratios**.
* 💰 Currently, India's GDP per capita is low, but if productivity increases to match China’s levels, it could lead to **substantial gains in the equity market**.
* 🏙 Urbanization remains a key factor, as **only one-third of India's population is urbanized**, suggesting potential for **rapid growth** similar to China's past trends.
* 📊 The Indian stock market has a market capitalization of nearly **$6 trillion**, making it the **fourth largest globally**, with a diverse sector distribution that **reduces investment risk**.
* 🔍 Despite the potential, Indian stocks are currently seen as **expensive**, with high valuations leading to **concerns about future returns** unless profits can **significantly increase**.
* ⚖ Corruption and governance issues, highlighted by the **Adani Group scandal**, raise red flags for investors, along with **volatility and currency risks** inherent in emerging markets.
* 💡 Overall, while there are compelling reasons to consider investing in India, potential investors should be cautious about **valuations and market conditions** before proceeding.

Today's video is sponsored by Incognito, an app that helps you take back control of your data privacy. Indian stocks have been on a tear recently, giving US stocks a run for their money. In this video, we look at the case for and against investing in Indian stocks, but also how

to get that exposure in your portfolio. If, after doing your own research, you decide to invest, and I'll end by giving you my opinion on investing in Indian stocks. Let's begin with the case for investing in Indian stocks, and we'll focus on demographics. Now, here's a

projection of the global map, but you'll notice it's not the usual projection. This shows you the size of each country scaled according to its population. And the reason why I'm displaying this is to show you the rather obvious fact that India has a very large population. The

reason why that's important, of course, is that it has a very large potential market size, and of course, that's going to be reflected in the potential profits of Indian companies that service their domestic market. Now, one of the big worries about investing in developed

markets is the very poor demographic trends that we see there. For example, if we look at the dependency ratio—and that's the ratio of older people who are 64 years old or older relative to the working-age population—and that's people between the ages of 15 and 64. Now, here

beside me you can see the trends of that dependency ratio for various countries. Japan's a bit of an outlier, which has a very high dependency ratio of about 50%, but notice that for all developed countries that trend is definitely upward sloping, even for China. In fact,

That rapid increase that we see recently is worrying. The real standout, in a positive way, on this graph is India, where the dependency ratio is only 10% and isn't increasing very rapidly at all. Now that's great news if you're a company that's selling into the Indian

market, or if you're looking for staff in India, say, in order to service that increasing demand for your goods and services. So we've seen that India has a lot of people, but if we look at the productivity—this is the amount of GDP generated per person in India—that's

still currently low. So if you are going to invest in India today, then you really are getting in at the ground floor. But what you have to hope is that that productivity increases, perhaps to the level of China, over your investment horizon. Now that would be a tall order;

it would be a six-fold increase in GDP per capita, but if it happens, that could create a lot of upside for the equity market in India. Urbanization is part of that trend. If you look at urbanization in developed markets, it's usually over 80%; China's kind of intermediate between

them and developed markets at about 65% urban, whereas in India, it's still the case that only one in three people are in urban populations. So one way to put it is that if you think that India is going to do a China and very rapidly urbanize

and also increase its productivity, then really there's a lot of upside from here. Now there are two other cases I think which are very strong for Indian equity, which is to do with market structure and geopolitics, but before we go on to that, today's video is sponsored by Incog, an

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link in incogni.org within 30 days of your purchase. Terms and conditions apply. The second compelling case for Indian equity is to do with market structure. Now, this data is as of 2024 and it shows you the market capitalization of various countries' stock markets, and India is in

At number four, so its market capitalization is just under $6 trillion, compared to the US's $54 trillion. That doesn't look very large, but bear in mind that countries like the UK only have a market cap of about $3 trillion. So certainly, this is a very large and

liquid market, which means that as an investor, the trading costs might be reasonably low. It's also a sign of the vibrancy of the market itself that that liquidity is there in the first place. Another promising thing about the structure of the Indian market is that

it's not all focused in one sector. It's often the case, if you look at emerging markets, that they do have that concentration. Now, there are lots of financials in India, so this is the pie chart showing you the breakdown of market structure according to sector, and

this is from the MSCI India index. So financials make up 27% of that market, and while that is the biggest sector, it is by no means completely dominant. There's still good diversification across other sectors. So if you do buy a tracker for

the whole Indian market, then you're not just buying a huge concentration in one sector, which makes that more risky. And as I said at the outset of this video, India has really given the US a run for its money since the pandemic in 2020, and that really set it apart amongst all

country stock markets, not just those in emerging markets. If you contrast that with China, which repeatedly sabotages its own stock market, you can see the vast difference in fortunes between India, which has surged upwards, and China, which has pretty much gone nowhere. The final case

My case for Indian stocks is geopolitical, and the first point is that the political system is fairly stable. It is a very large democracy, and that's in comparison to its neighbors.  Say, it is still an emerging market country after all, but relative to those other emerging

countries, I'd say that one of the strong points of India is its democracy. It holds regular elections; you get peaceful transitions of power, which isn't even true of some developed market countries, it has to be said. And the Election Commission of India, the ECI, plays a

really vital role in safeguarding that democratic process, and it does so by ensuring free and fair elections. A remarkable fact about the Indian electorate is its size. So in the 2024 election, there were 968 million people who were eligible to vote—almost a billion people. Another key

point, I think, is to do with reforms that India is going through as it develops its economy. So that comes in the form of digitalization, also demonetization, and their Goods and Services Tax. All of those have improved transparency in trade and also tax compliance, and then

those taxes which are generated can be used to reinvest into things like infrastructure. Furthermore, the Indian government has opened its bond market to international investors, and that's allowed the flow of capital into that Indian market, which is going to benefit India. Also, India's been investing in its

infrastructure—in its ports, in its rail system, in its road networks—and that should reduce logistics costs and also the time taken to transport goods across the country. Furthermore, some of my clients are Indian, and they tell me about investing in their domestic market and how it's got a real buzz at the

moment, so there is very active domestic investment back into their own equity market. For example, in 2020, three domestic investors put about $22 billion US into Indian markets. That followed a record investment of $36 billion the previous year. Furthermore, this marks a

third successive year when domestic investment into the equity market in India was greater than that of foreign investor flows. So I think that domestic investor base is something that will probably prop up the Indian equity market for many years to come. Many people in India are now investing in

mutual funds which invest in their domestic market, but it's not all positive. Now let's focus on the case against Indian stocks, and I think the main one is to do with valuation. Almost by any measure, if you look at Indian stocks, they look expensive right now,

more expensive indeed than the United States. So here you can see Robert Shiller's cyclically adjusted price-to-earnings ratio, which is a measure of expensiveness over time, and you can see that compared to the US, it's considerably more expensive right now.

Compare that with the UK and China; well, they're looking really cheap at the moment. Why is that a problem? Well, if people are overpaying for Indian stocks, that usually reduces future returns, unless fundamentals—profits—can really tear ahead and justify these very high valuations, which is a tall order.

Another case against India, I think, is the restrictions which that society has. And here a useful thing to look at are the freedom indices. So if you're not familiar with that, look up the Cato Institute, but the process by which they create this FRDM ETF in the United States is

Shown here beside me, so they start off with 24 emerging market countries. That's at the top of this pyramid, and the stocks in those countries, and they screen those countries according to market capitalization. Now, as we've seen, India would almost definitely pass that test, but then they filter by freedoms. What do

I mean by freedom? Well, in this case, it's personal and economic freedoms, and they have many different scores for that—83 quantitative scores—which allow them to rank countries. They also filter out state-owned enterprises, which, it has to be said, there aren't many of in India

compared to China, say. The end result of all that filtering is that India's not listed in the freedom index at all. So I personally think that's a bit of a red flag when it comes to investing in a country, particularly in emerging markets. Now, another

hallmark of investing in emerging markets—one of the risks—is corruption. And in this case, a recent scandal is to do with Gautam Adani. Here's the story that was in the FT recently, all about that scandal. Now that really kicked off with a report from

Hindenburg, the famous short-sellers, and they did really extensive research over a series of years where they spoke to dozens of individuals, including former senior executives of the Adani Group, and they also conducted site visits in many countries—almost half a dozen of them.

According to their report, possibly one of the most worrying things that they say in the report is that, even if you ignore the findings of their investigation and just focus on the financials of the Adani Group, they say that its seven key listed companies have 85%

Downside purely on a fundamental basis, owing to their sky-high valuations. They also point out that many of these Adani companies have taken on lots of debt, and another red flag they point out is that eight of the 22 key leaders in the Adani Group of companies are Adani family members. That places the control of the group's financials and key decisions in the hands of just a few people.

So that report was published in January 2023, but in November 2024, the US Attorney's Office published this indictment. This indictment alleges schemes to pay $250 million in bribes to Indian government officials, and this was allegedly to lie to investors and banks to raise billions of dollars of capital for these Adani companies.

Deputy Assistant Attorney General Miller went on to say these offenses were allegedly committed by senior executives and directors to obtain and finance massive state energy supply contracts through corruption and fraud, at the expense of U.S. investors.

So corruption is always a worry when you're investing in emerging markets, and it's often the case that you get these scandals which then blow up and negatively impact sentiment in a particular market. India's certainly managed to shrug it off so far, but we'll just have to see what happens with this criminal case.

Now, when you're investing in emerging markets, there are other concerns, of course. These tend to be very volatile markets; the price fluctuations tend to be very large. So a very large allocation to these countries is probably unwise. Furthermore, you're also taking currency risk in this case with the Indian rupee. Now that has been devaluing versus the U.S. dollar for some time.

Time and other developed market currencies so that could be a headwind for your investment. It may also add additional volatility if there is a currency crisis. There's also an energy exposure when you invest in India; they import over 80% of their oil. So if we

did see energy prices spike again, then that would have a negative impact on Indian stocks. And then finally, I think the state of euphoria which Indian markets currently find themselves in is a worrying one when it comes to investing right now. High valuations remember usually mean lower returns in

the future, and if we do get escalation of this crisis from Adani or perhaps even other crises, then that could be a problem for that sentiment and could make it disappear. But let's say you did want to go ahead and invest in Indian stocks; how could you go about it? Well,

fortunately, there are many funds which give you exposure to Indian stocks. Here, for example, are some which I found on just ETF, and they're not all expensive by any means. The column to focus on here is the TER column; that's the total expense ratio, and certainly for the two funds at

the top, you can see the expense ratio is 0.19%, which is quite reasonable for emerging markets. If you're based in the US, you can use VOO or ETF.B to do a similar search for ETFs that give you Indian exposure, and again, there are lots

of choices here. Why haven't I listed any actively managed funds here? Well, it's certainly the case, even in India, that stock pickers don't tend to do very well over the long term. So if you are paying an active fund manager to try and beat

An MSCI India index says it's very unlikely that you're going to succeed, whether you look at large caps, mid-caps, or even the bond market. You can see that about 70% of those active fund managers are beaten by the broad market index in

summary. Then I think that there's a really compelling case, certainly in terms of demographics and in terms of market structure, for investing in India. What would put me off at the moment is the valuations, which are even higher than in the US. But certainly if there

was a pullback in equity markets, I'd certainly have an eye on India and I'd certainly consider it as part of my market crash shopping list, because I think over the long term there's a lot of upside here. Potentially there's a lot

going in India's favor over that long term that could push their equity market way ahead. Now, don't forget the sponsor of today's video, Incognegro, which lets you take back control of your personal data. They've got a special offer which gives you a 60% discount on

your annual subscription. You get a 30-day money-back guarantee; terms and conditions apply. And if you want to find out more about that, just go to the link in the description below. And as always, thank you for listening.

Investing In India

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

I publish a new video on YouTube every Saturday and you can join me for a live Q&A on the 1st Thursday of every month at 7pm UK time.

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Large and growing population, creating a vast potential market.

Favorable demographic trends compared to developed nations; low and stable dependency ratio.

Currently low productivity, offering potential for significant growth.

High urbanization potential mirroring China's growth trajectory.

Large and liquid stock market with diversified sectors, reducing risk.

Politically stable democracy with regular elections and a strong Election Commission.

Economic reforms (digitalization, demonetization, GST) improving transparency and tax compliance.

Strong domestic investment exceeding foreign investment flows.

Arguments Against Investing in Indian Stocks

High valuations compared to other markets, potentially reducing future returns.

Concerns regarding societal restrictions based on freedom indices.

Corruption concerns highlighted by the Adani Group scandal.

High market volatility, currency risk (Indian Rupee devaluation), and significant energy import dependence.

Current market euphoria and high valuations could lead to future price corrections.

Utilize ETFs offering exposure to Indian stocks with reasonable expense ratios.

Avoid actively managed funds due to their low long-term success rate compared to index funds.

Compelling long-term prospects due to demographics and market structure, but current high valuations are a concern.

Consider investing after a potential market pullback.