Asia-Pacific News

India stocks hit record highs as experts consider their 'safe haven' potential

Key Points
  • India's benchmark S&P Bombay Stock Exchange has closed at a record high for the fourth day in a row.
  • A range of factors have prompted emerging markets experts to consider Indian equities as a relative safe haven while trade tension between the U.S. and China hots up. These include growing domestic demand and Prime Minister Narendra Modi's bid for re-election next year.
  • But, the rising price of oil and a weak rupee threaten this theory.
A guard walks past the National Stock Exchange building in Mumbai, India, on February 9, 2018.
Danish Siddiqui | Reuters 

As India's stock markets soar to record highs last week, shares could be in a sweet spot that has prompted one emerging market investor to consider the asset class a "safe haven."

India's benchmark S&P Bombay Stock Exchange (BSE) ended trade on Friday up 0.95 percent at 37,336.85, having hit a record high for the fourth day in a row. Meanwhile, the broader NIFTY 50 continued its rise, ending up 0.99 percent higher at 11,278.35 after hitting an all-time high of 11,283.40. For the week, the NSE index gained 2.44 percent, its biggest gain since the week ending March 17, 2017, according to Reuters.

Performance was boosted by strong corporate results as firms reported their second-quarter figures.

The positive sentiment contrasts with the dark cloud of uncertainty that has hung over global markets as the U.S., China and Europe grapple with a war over import taxes.

It is thanks to a combination of factors that India is a "relative safe haven for equity investors," according to Jon Harrison, managing director for emerging markets macro strategy at research firm TS Lombard.

"India is a relatively closed economy," he explained to CNBC via e-mail, adding that the country was "less involved in regional supply chains than some of the more high-tech Asian economies." The World Bank puts India's export figure for 2017 at 18.9 percent, meaning that it is more cushioned from fluctuations in international trade flows than, say, China, South Korea and Vietnam.

In addition, India may benefit as investors turn away from China. "India is the other large Asian equity market, so investors who want to maintain an exposure to Asian equities but fear the impact of the trade war would favor India over China," Harrison said.

Domestic politics could also favor the equity market. Acting ahead of an election next year, Indian Prime Minister Narendra Modi's government has increased state support for farmers and is on a push to extend social security, both strategies which could boost consumer spending.

India is predicted to be the world's fastest-growing major economy this year, with gross domestic product set to increase by 7.3 percent in 2018, according to the World Bank.

Nonetheless, Harrison added the caveat that India could only be considered a safe haven in what is "a very negative overall environment for emerging market assets."

Roger Jones, head of equities at asset manager London and Capital, echoed Harrison's thinking. India is a "domestic demand driven economy," he told CNBC via e-mail, adding that "foreign direct investment remains strong and is unaffected by trade threats."

Ricochet effect

But, Jones suggested that the ricochet effect of the global trade war could hurt India. Rising commodity prices thanks to protectionism, in particular that of oil — of which India is a major importer — could hit the South Asian country, he said.

The has strengthened against the Indian rupee over the past few months. India "can't be a safe haven with a weak currency," Derek Scissors, an India expert at the think tank American Enterprise Institute, told CNBC lastweek via email.

"You'd have to be either willing to accept short-term currency risk for the sake of stock gains or believe U.S.-China trade will remain unsettled for several years," he explained. "Both (principles are) reasonable plays but India is not safe right now."

Given the strong equity performance, Indian stocks do risk getting too expensive. But, Harrison pointed out that they always have been so in relation to global emerging markets. "India did underperform (in the first quarter of 2018) so the recovery since then has in part been catch-up — and for the reasons mentioned previously, there is some justification for the market to do well."

Indian Prime Minister Narendra Modi delivers the keynote address at the IISS Asia Security Summit: The Shangri-La Dialogue, in Singapore on June 1, 2018.
Roslan Rahman | AFP | Getty Images