India: the disconnect between fundamentals and the market

The performance of the Indian stock market has recently been lacklustre. This is despite a significant improvement in the economic environment, with 100bp of interest rate cuts in 2025 (to 5.5%) and significant cuts in income tax in the February budget followed by the recent rationalisation and reduction of the Goods and Service Tax. This is in addition to continued elevated spending on infrastructure, and a further successful monsoon (with rainfall 108% of the long run average) which will boost the rural economy.  Inflation remains low (2.1% year on year in August) and foreign exchange reserves remain robust ($700.2bn as at 26th September).

So, why the subdued performance?  We ascribe this to 3 factors:

  1. Earlier concerns about a weakening growth environment: with Q3 2024 GDP reported at just 5.4%. This was due to a number of one-off factors, and does not represent the underlying growth dynamic as evidenced by subsequent GDP growth in the first two quarters of 2025 of 7.4-7.8%. These stronger prints are prior to the impact of the interest rate and tax cuts, and thus we expect a strong upcoming Festival and Wedding season. Indeed, the Reserve Bank of India revised up their expectations for GDP in their October 2025 policy meeting, and gross foreign direct investment rose 33% in the first four months of this fiscal year to an all-time high for that period of $37.7bn.
  2. Geopolitical noise following Trump’s tariff imposition on India. In our view, this is largely irrelevant as exports to the US represent just 2.5% of Indian GDP and India’s circa 7.5%+ GDP is driven by domestic structural growth (such as urbanisation and the shift to the organised sector), in stark contrast to China’s export driven economy.
  3. A switch to alternative investment destinations. AI-related stocks have driven strong performance in markets such as Taiwan, as well as also having a significant influence on the performance of China and Korea. We believe that a reduction in foreign allocations to India has partly funded that switch. However, domestic investors continue to add to the Indian market (with inflows in July 2025 reaching a 9 month high) which demonstrates their confidence in the outlook for their home market. Furthermore, we do not believe that the Indian story should be seen as a tactical allocation for short term alpha, rather a structural, relatively uncorrelated long-term growth opportunity. We expect that foreign flows will resume to India as investors appreciate the significantly better economic environment and lock-in exceptional profits from elsewhere. Indeed, HSBC upgraded India to an ‘overweight’ last week. Finally, increased interest in Emerging Markets more generally and the resultant inflows into the asset class (which have accelerated in recent weeks) will also benefit India, as the third largest weighting within the universe.

Turning to valuations, which are never ‘cheap’ in terms of an absolute low p/e number, due to the multi-year structural growth opportunity which is not captured in a 1-2 year forward p/e. In addition, India benefits from a high Return on Equity and good corporate governance compared to many other markets. Nevertheless, current p/e valuations have descended back to their 5yr average and p/b valuations are approaching 1 standard deviation below their 5yr average. We believe that these are unjustified given the substantially improved outlook.In conclusion, we believe that the disconnect between the strong and improving fundamentals of the Indian economy and the lacklustre stock market is purely transitory, providing a potential opportunity for the long-term investor.

Source: Alquity, Government of India, JP Morgan, Spark, CLSA, HSBC October 2025

Disclaimer: 

This is not an offering memorandum or prospectus and does not constitute investment advice. This is a marketing communication that is intended for information purposes only. The content, including external data sources, is believed to be reliable but no assurances or warranties are given. The companies mentioned are shown for illustrative purposes only, do not constitute investment advice, and are not a recommendation to buy or sell any security.
Investments in emerging markets, including India, involve greater risks, including political, currency, and liquidity risks.
Prospective investors should read and understand the terms of the Prospectus (including the risk factors) prior to purchasing units in any of the funds. There can be no assurance that the fund’s investment objectives will be achieved and investment results may vary substantially over time. We do not provide financial, tax or legal advice and we recommend that you obtain your own independent advice tailored to your individual circumstances prior to investing. Prospective investors should be aware that the value of
investments can go down as well as up and past performance is not an indicator of future performance. Investors should be aware that by investing in the fund, they risk losing all or part of the capital invested. The Alquity Asia Fund, Alquity Future World Fund, Alquity Indian Subcontinent Fund and Alquity Global Impact Fund are sub-funds of the Alquity SICAV (the “Fund”), which is a UCITS-compliant investment vehicle and a recognised collective investment scheme under the Financial Services and Markets Act 2000 (FSMA) in the United Kingdom.
The Alquity SICAV is an open-ended investment company managed by Limestone Platform incorporated under the laws of Luxembourg and authorised by the Commission de Surveillance du Secteur Financier
(CSSF). The Fund is authorised under the UCITS Directive (Directive 2009/65/EC). Sub-funds may not be registered for distribution in all jurisdictions. Alquity Investment Management Limited acts as the investment manager to the SICAV.
This marketing communication is issued by Alquity Investment Management Limited (“AIML”) for distribution both within and outside the United Kingdom. AIML is incorporated in England and Wales (Company No. 07992381) and is authorised and regulated by the Financial Conduct Authority (FRN 463991). Its registered office is Audrey House, Ely Place, London, EC1N 6SN.

Why India?

It’s one of the biggest economies in the world, has one of the strongest projected GDP growth rates and is home to the largest population on Earth. Despite these credentials, it’s fair to say, at best, most investors have limited exposure to India. 

Investors have long believed that putting their money to work in an emerging market or Asia fund is enough, but India is experiencing multiple tailwinds that are propelling its global ascendency and those with purely token exposure ought to reconsider.  

For many years there has been talk that the 21st century will be India’s century, just as the 20th proved to be America’s, and the 19th is considered Britain’s. Whether this comes to pass or not, there remain many reasons investors need to be paying more attention to India.  

India = growth 

First and foremost, India is a growth story. In mid-2025, India became the world’s fourth largest economy after its GDP nudged ahead of Japan’s (see Table 1), according to the International Monetary Fund (IMF)(1).  

By the end of this decade, the IMF is projecting that India will overtake Germany to become the third largest economy in the world, as it is on course to hit $6.77trn by 2030, compared with Germany’s forecast of $5.58trn(2). 

Table 1

India is projected to achieve real GDP growth of 6.2% in 2025(4), which is the strongest among the countries listed in Table 1. Its closest competitor is China, which is forecast to achieve 4% growth(5).  

Seven of the top 10 economies are on course to grow between 0.4% and 2% in 2025. The only outlier is Germany, which is not expected to record any real GDP growth(6).  

India = ambition 

In addition to the positive and improving economic outlook, Prime Minister Narendra Modi has outlined a series of ambitious targets. When India marks its centenary of independence in 2047, the goal is that the country will also be able to celebrate its elevation from emerging to developed market.  

As such, in November 2023, his government unveiled Viksit Bharat(7) (Developed India), a declaration of intent to uplift all facets of India’s society and economy. The primary goal is for the country to become self-reliant and prosperous by 2047(8).  

Growth is the game plan. To achieve the government’s ambitious GDP target of $30trn by 2047 – the current size of the US economy – India’s economy needs to grow more than seven-fold over the next two decades. This means, on average, GDP needs to rise by 8-10% every single year.  

The social and economic reforms outlined by the Modi government are expected to be among the primary accelerators of this growth.  

Steps have been announced to improve the ease of doing business in India, as well as greater support for micro, small and medium-sized enterprises (MSMEs) and startups(9).  

Efforts have long been underway to help mostly small and rural businesses transition from the informal to the formal sector, as these companies are recognised as an essential and growing part of the Indian economy.  

A successful transition means companies will be able to access finance and government support, as well as benefit from greater legal and regulatory protections(10). Workers will enjoy legal protections, like a fixed salary; healthcare benefits; paid leave; and retirement savings(11). 

India = demographics  

Equally important are the social reforms Modi’s government has outlined as part of Viksit Bharat. These include zero poverty, female empowerment, quality education and affordable and comprehensive healthcare. 

In April 2023, India’s population reached 1.42bn, surpassing China to become the world’s most populous country. The UN estimates that the number of people in India will peak at around 1.7bn by the 2060s, whereas China’s population has already started to decline(12).   

Importantly, India is home to a lot of young people. According to the US Central Intelligence Agency (CIA), as of 2024, the median age of India’s population was 29.8 years. This compares with 49.9 years for Japan, 46.8 in Germany, 40.2 years in China and 38.9 in the USA(13).   

A young, healthy and well-educated population creates a virtuous circle of growth. It will result in a stronger workforce that is able to take on more high value jobs, which means higher wages, a larger middle class and even greater discretionary spending.  

India = business 

When investing in India, most fund managers turn to the MSCI for ideas and inspiration. Comprised of the large and mid-cap segments of the market, the MSCI India Index is made up of 158 companies, covers 85% of the Indian equity universe and falls into 11 broad sectors (see Chart 1)(14).

Chart 1

Investors, therefore, tend to be largely exposed to India via ETFs and funds that are dominated by large cap companies, which means they miss out on the opportunities available in the small cap space.   

Indexes are also backwards looking, recognising the achievements of the past but not necessarily the growth opportunities of the future.  

Research from McKinsey has identified 18 transformative ‘arenas’ in India (see Table 2) it believes ‘could experience significant growth, technological advancements, and sustained investment dynamics’(16).  

The report stated: “Nine of these are global arenas where Indian companies could attain disproportionate growth through distinctly Indian capabilities. The other nine are what we define as ‘national’ arenas or sectors that could advance long-term strategic interests and fuel growth in a uniquely India-specific context.  

“This mix of global and national arenas could play a pivotal role in realising India’s vision of becoming a developed economy by 2047,” the McKinsey report added(17).    

Table 2

When compared with the (admittedly) broad categories included in the MSCI India Index (see Chart 1), the full extent of opportunities that investors risk missing out on becomes clear.  

And there is no shortage of current and budding entrepreneurs in India. The 2024/25 Global Entrepreneurship Monitor, which assesses national levels of entrepreneurial activity each year, ranked India fifth out of 56 countries(19). It found that 85% of Indians are confident they have the skills or knowledge to start their own business. A similar proportion said they felt it was easy to start a business in India.   

India = opportunity 

Investors often have a myopic view of India. The 158 predominately large caps in the MSCI India Index overshadow the fast-growing and innovative smaller companies that are emerging each year.  

India’s size, scale, population and strong growth don’t seem to generate the same level of international headlines as other countries.  

But there are so many factors at play that all point to a bright future for India. It boasts a strong and growing economy, an increasingly well-educated and healthy population, and strong levels of entrepreneurship. All of this is backed by a stable government that has demonstrated how ambitious it is.  

Investors need to take note. The Indian growth story is far from over.   

 

Disclaimer: 

This is not an offering memorandum or prospectus and does not constitute investment advice. This is a marketing communication that is intended for information purposes only. The content, including external data sources, is believed to be reliable but no assurances or warranties are given. The companies mentioned are shown for illustrative purposes only, do not constitute investment advice, and are not a recommendation to buy or sell any security.
Investments in emerging markets, including India, involve greater risks, including political, currency, and liquidity risks.
Prospective investors should read and understand the terms of the Prospectus (including the risk factors) prior to purchasing units in any of the funds. There can be no assurance that the fund’s investment objectives will be achieved and investment results may vary substantially over time. We do not provide financial, tax or legal advice and we recommend that you obtain your own independent advice tailored to your individual circumstances prior to investing. Prospective investors should be aware that the value of
investments can go down as well as up and past performance is not an indicator of future performance. Investors should be aware that by investing in the fund, they risk losing all or part of the capital invested. The Alquity Asia Fund, Alquity Future World Fund, Alquity Indian Subcontinent Fund and Alquity Global Impact Fund are sub-funds of the Alquity SICAV (the “Fund”), which is a UCITS-compliant investment vehicle and a recognised collective investment scheme under the Financial Services and Markets Act 2000 (FSMA) in the United Kingdom.
The Alquity SICAV is an open-ended investment company managed by Limestone Platform incorporated under the laws of Luxembourg and authorised by the Commission de Surveillance du Secteur Financier
(CSSF). The Fund is authorised under the UCITS Directive (Directive 2009/65/EC). Sub-funds may not be registered for distribution in all jurisdictions. Alquity Investment Management Limited acts as the investment manager to the SICAV.
This marketing communication is issued by Alquity Investment Management Limited (“AIML”) for distribution both within and outside the United Kingdom. AIML is incorporated in England and Wales (Company No. 07992381) and is authorised and regulated by the Financial Conduct Authority (FRN 463991). Its registered office is Audrey House, Ely Place, London, EC1N 6SN.

Sources:
  1. International Monetary Fund
  2. International Monetary Fund
  3. International Monetary Fund
  4. International Monetary Fund
  5. International Monetary Fund
  6. International Monetary Fund
  7. India’s Journey to Becoming a Global Superpower
  8. Meaning, Vision, Objective, Registration
  9. Bold Vision, Brighter Future
  10. Rethinking Formalization
  11. The Transition of India’s Economy Towards Formalization
  12. Department of Economic and Social Affairs
  13. CIA – Median age
  14. Blackrock – iShares MSCI India UCITS ETF
  15. India’s future arenas: Engines of growth and dynamism
  16. India’s future arenas: Engines of growth and dynamism
  17. India’s future arenas: Engines of growth and dynamism
  18. The so-called Bio-to-X market includes various sectors that exploit biological raw materials, such as biofuels and bioplastics
  19. Global Entrepreneurship Monitor

 

India: Is the recovery here?

  • Although economic growth was suboptimal in CY2019 at 5.3%, 2020 began strongly with PMI data in Q1 reaching 8-year highs
  • Coronavirus has delayed this turnaround, but not destroyed the green shoots emanating from rural areas
  • The government stimulus package remains underappreciated by the stock market
  • Reform momentum has restarted
  • Although there are risks to our thesis, we believe that they are well-managed at this juncture
  • Our primary focus remains on companies that will benefit from domestic, particularly rural, opportunities providing exposure to an uncorrelated source of growth versus the expected recession in Developed Markets
  • The increasing geo-political tension between China and USA could provide economic opportunities for India over the medium term
  • Given the favourable structural characteristics of India (e.g. demographics, and the shift from the informal to formal economy), the positive near-term outlook and compelling valuations, we believe that this is an exciting, less-correlated opportunity for the long-term investor
future world

China: Leading the global recovery? – April 2020

  • China was the first to suffer with coronavirus, and we expect China will be the first to exit the crisis
  • Although China is a major global manufacturing hub, exports only account for 20% of GDP and domestically driven demand is more important
  • Government stimulus has already been significant, but the incremental nature of the announcements has led to an underappreciation of the magnitude of the package
  • China is the largest part of our portfolios, representing 29.7% of Alquity Asia and 28.4% of Alquity Future World. We are invested predominantly in domestically-driven stocks
Shanghai

Asian Small Cap stocks: about to rise like a Phoenix? – March 2020

In this article, we examine the investment case for Asian small cap stocks which have recently been out of favour with investors. We start with an analysis of the key drivers that resulted in small cap Asian stocks delivering stronger returns than large caps at various points in time after the Global Financial Crisis (GFC). We use the FTSE Asia Pacific ex Japan ex Australia ex New Zealand All Cap and Small Cap indices for the analysis.

We find that the Chinese yield curve has been one of the most prominent drivers of the (out)performance by small caps. There is a strong parallel with the current environment, where we expect that central banks will continue to shift to an increasingly accommodative monetary policy stance, which will contribute to the strength of domestic economies and in turn benefit small caps once again. This is combined with compelling valuations and increasing signs of deglobalisation, further strengthening the arguments for investing in Asian small caps.

Trip report: India – December 2019

Mike Sell and Kieron Kader spent 10 days of December in India travelling to Delhi, Mumbai, Chennai, Lucknow and Kanpur. The team visited 38 companies including 20 of our fund holdings. In addition, they conducted a range of channel checks and also met one of the Transforming Lives Awards winners, Phool, where they held a consumer survey panel.

 

CONCLUDING THOUGHTS

We had said that we expected to see growth from the festival season onwards. Despite the last two GDP prints of 5% and 4.5% which were worse-than-expected and caught everyone by surprise – our initial view has been confirmed by our detailed on-the-ground meetings. The short-term volatility has been pervasive and worse than expected, but the stimulus provided by Modi’s government, the accommodative monetary policy and the strong monsoon has started to buoy the economy from November, and we should thus see improving growth and sentiment. There have also been delays in the construction sector, which have now started to subside even in the key state of Maharashtra which has experienced a change in government. The Kharif crop harvest between January and March will be a strong support for the rural economy. Overall, our expectation is for growth to follow a U-shape recovery rather than a V-shape, with the financial sector a noticeable laggard. Thus, we expect GDP growth of 3.9 – 4.7% in Q4 followed by 5.1% in Q1. Longer term, our view is that the liquidity issues, demonetisation and GST are ultimately positive, as they leave better quality companies in the system and refocuses them on proper capital allocation.

Overall, we remain positive on India and combined with current valuations (especially in the mid cap space, which are compelling, see figure 11 and 12 below), we believe that this market has the potential to deliver one of the best performances within the EM space over the coming years.

Shanghai

Investment notes from Greater China – October 2019

Mike Sell, Alquity’s Head of Asian Investments and Kieron Kader, Asia Investment Analyst spent 11 days in Greater China visiting 18 companies in Hong Kong and 12 across Shenzhen, Hangzhou, Nanjing and Shanghai.
Mike and Kieron visited existing holdings to reassess the outlook for corporate earnings. They also visited competitors to understand the overall environment, as well as brand new investment ideas. This was a valuable opportunity to discuss the effects of the trade war on the Chinese domestic economy, and reactions to the stimulus packages issued by the Chinese government.

 

CONCLUDING THOUGHTS

The main conclusion to draw from our trip is that there are areas of brightness – particularly in our domestic growth focused sectors.
Our long-standing view that the Chinese domestic economy continues to perform well has been confirmed by the key industries. However, some corporates (particularly in exporting industries) expressed uncertainty for the near term, but also mentioned that government stimulus may provide support (e.g. further reserve requirement rate cuts, tax cuts, as well as industry-specific policy). Selective domestic growth driven sectors that we invest in (property, beer etc.) showed confidence for the short and medium term. We have also identified a number of high quality domestic-focused companies that are worthy of further due diligence.
Whilst overall growth is reasonably healthy, some areas are challenged and remain undesirable. However, there are areas of outstanding growth and we remain positive. Combined with the fact that valuations are attractive, we maintain a substantial weighting to the market.

Indonesia: Overlooked and unloved

Mike Sell, Alquity’s Head of Asian Investments, spent a week in Indonesia for his regular on-the-ground meetings with local companies. Mike had 16
meetings and 33 store visits in 3 cities with the goal of re-assessing the macroeconomic and business outlook ahead of Presidential elections in April, and to discover new potential ideas for the portfolios. As a result of the trip, followed by further desk-based analysis, we have already increased our weighting across our portfolios and expect to continue to do so.

 

Concluding thoughts

Indonesia has been largely ignored by investors despite the country’s sound inherent characteristics and its solid economic prospects. The country perfectly encapsulates our key investment themes of monetisable structural growth opportunities thanks to its young and steadily rising population, ongoing urbanisation and the roll-out of structural reforms. Reforms by President Jokowi’s government have already improved the country’s growth prospects. This has not been appreciated by markets, which is also proven by the fact that investors’ aggregate exposure to Indonesia is at historical lows. The re-election of Jokowi should result in capital flows targeting Indonesia again.

Consequently, we are of the view that the Indonesian market offers an attractive entry point from a risk-reward aspect, since there are some excellent companies, who sustainably benefit from the country’s structural domestic growth momentum. Such stories can be found in industries such as cement, consumer or financials. We have already increased the weighting across our funds and expect to continue to do so.

India

Investment notes from India

Mike Sell, Alquity’s Head of Asian Investments, spent nine days in India for on-the-ground meetings with local companies. He met with 33 company managements in total, as well as undertaking a day of retail store visits in Patna (in the state of Bihar).  The goal was to meet with the majority of our existing holdings and to reassess the outlook for corporate earnings following the second quarter results and recent macroeconomic gyrations.

In addition, we wanted to stress test the sustainability of our holdings’ competitive advantage through meeting with challenger brands particularly in the financial and retail sectors.

 

Concluding thoughts

Our on-the-ground meetings with 33 companies were very fruitful, as they reaffirmed our longstanding view that the domestic economy is in a solid shape. Furthermore, economic activity has not been derailed by spiking oil prices or trade tensions, and thus the structural domestic growth will continue without being adversely impacted in a meaningful manner. Once elections are behind us, idiosyncratic sources for asset price volatility should subside. Any volatility before then will provide opportunities for investors.

Specifically, we believe that there are three key trends that investors are missing: the accelerating growth in the rural economy, rising margins across certain industries, and the re-emergence of the private sector capex cycle.

Overall, we remain extremely positive on India, as the economy is on a firm footing and has the potential to deliver one of the best performances within the EM space over the coming 3-5 years.

Investment notes from Greater China

Mike Sell, Alquity’s Head of Asian Investments spent ten days in Greater China visiting 22 companies in Hong Kong and four in Taiwan. He was joined by Dan Billis, a new addition to the Asia Investment team. Despite being caught in Typhoon Mangkhut, Mike and Dan visited both existing and new potential holdings. Our regular on-the-ground meetings in September provided a good opportunity to discuss the relentless negative news relating to the global trade war with the companies we met; whether and to what extent the imposition of tariffs impacts the Chinese domestic economy.

 

Concluding thoughts

The view from all our company meetings regardless of sector was undoubtedly positive. Overall, we returned with our conviction on the macro outlook reaffirmed. As a result, we sustain our long-standing view that the Chinese domestic economy is in a solid and much better shape than most people believe, which also strongly implies that trade woes and the imposition of tariffs are very unlikely to derail the underlying economic momentum in China. Once the majority of market players realise that the domestic economy is well-insulated from external shocks, the high quality stocks of domestically-focused companies (of which we have successfully identified a number) will continue to deliver, despite recent sentiment-driven poor share price performance. We have been increasing the weighting of China across our portfolios and will continue to do so.