Indian Retail Investors Shrug Off Growth Slowdown To Push Stocks Higher

India’s domestic investors are pushing deeper into stocks despite clear signs of economic deceleration, driving equity allocations to 15% of financial savings – nearly double the historical peak of 8-9% – even as foreign institutions retreat.

The surge in domestic flows has more than offset foreign institutional selling, with India’s benchmark Nifty index up 14% this year. The broader market is up 20% in local currency terms, though both figures fell short of expectations after markets were up 19% and 25% respectively until September.

Behind the divergence lies what Bernstein calls “one of the lowest-quality investing phases” it has seen. Earnings models and fundamental analysis have lost their predictive power as retail investors chase growth stories, particularly in mid-sized companies.

The numbers stretch credibility. Current valuations imply compound annual free cash flow growth of 13% for the Nifty index and 20% for mid-caps extending to 2040 – assumptions that would require India to sustain Chinese-style growth rates for decades. The irony: India’s GDP growth of 5.4% in the September quarter matches China’s, despite India’s significantly smaller economic base.

“Markets can stay irrational longer than one can stay solvent,” Bernstein’s analysts note. “However, speaking of wisdom, we must also question if this is a trend that can continued to be taken for granted, or one day the chickens will come home to roost.”