India market-cap at striking distance from Hong Kong. How long before India overtakes?

Since April, Hong Kong's Hang Seng Index has surged over 12 percent, emerging as the world's top-performing major index, pushing it into bull market territory, up nearly 20% from its January low

With the steady rise in Indian stocks taking BSE’s market-cap to $5 trillion, it is now within striking distance of Hong Kong, which commands a market-cap of $5.39 trillion currently. NSE’s market-cap stands slightly short of $5 trillion, at $4.95 trillion.

India thus occupies the Number 5 slot, after the US, China, Japan, and Hong Kong, in the pecking order of top stock exchanges in the world in terms of market-cap. This milestone of $5 trillion market-cap achieved on May 22 marks a significant moment in India's economic rise. It signals India's growing economic strength and potential to challenge established financial centers, experts said.

Deepak Jasani, head of retail research at HDFC Securities, emphasizes that the recent recovery in the Hong Kong and Chinese markets has boosted their market-cap. However, analysts anticipate India will eventually surpass Hong Kong, albeit the time frame remains uncertain. Factors such as economic growth differentials and corporate profitability will play a significant role in bridging the gap, Jasani said. “The present administration coming back to power will further accelerate economic growth and sustain the momentum,” he said. This could help bridge the $388 billion market-cap sooner than later.

Since April, Hong Kong's Hang Seng Index has surged over 12 percent, emerging as the world's top-performing major index, pushing it into bull market territory, up nearly 20% from its January low. This marks a significant reversal after years of losses, with over $3 trillion wiped off the city's stock market due to concerns over China's economic prospects and geopolitical tensions. However, factors like a stronger Chinese economy, lower valuations, and increased mainland investments in Hong Kong to hedge against currency risks have revitalized the market. Additionally, the Chinese government's announcement of a Rmb300bn ($41bn) fund to bolster the real estate sector suggests a concerted effort to address a three-year slowdown, further buoying market sentiment.

Kranthi Bathini, director of Equity Strategy at WealthMills Securities said India, on the contrary, could potentially surpass Hong Kong's market capitalization soon, driven by strong domestic factors like macroeconomics and consistent growth across all levels. The expectation of improved fiscal discipline and rising earnings of Nifty 50 companies further fuel optimism.

Bathini anticipate sectors that have been inactive in the rally to join in soon. Banking and IT firms, both major segments in the market, have been relatively quiet since the year began. However, their potential resurgence could drive India’s market capitalization in the coming quarters. A rate cut from global central banks could spark momentum in financial services, while improvements in global macros may lead to increased participation from the IT sector.

Some market experts also feel that if a further rally post-election amid euphoria over a strong government mandate were to happen, it could make markets vulnerable to a downturn thereafter. “There's limited scope for further PE re-rating, and the market has already priced in excessively high earnings growth, potentially unsustainable in the medium-term,” said Ajay Bodke, an independent analyst.

Bodke warns of unchecked euphoria and irrational exuberance driving a market frenzy. Many sectors are trading at very high premiums compared to historical averages, with numerous companies priced for extremely high earnings growth, setting the stage for potential disappointment in upcoming quarters and leaving the market vulnerable, he said.

The SEBI chief recently cautioned about excesses, particularly in small and mid-cap segments and SME bourses, where price movements often disconnect from fundamentals. Limited stock availability and concerted efforts by stakeholders have contributed to sharp price increases. While substantial SIP inflows act as a counterbalance to FII selling, the market remains sensitive, especially as competing emerging markets offer more appealing valuations.

"Profit-taking by FIIs is expected to persist, heightening the vulnerability of Indian equity markets to significant corrections. For many small investors accustomed to continuous market gains, navigating potential wealth erosion and prolonged sideways movements post-correction will be a fascinating challenge," Bodke added.