India's recent stock market surge has investors viewing the country as an emerging market poised for long-term outperformance. The India NSE Nifty 50 Index , the country's domestic stock market benchmark, has soared 18.7% this year, hitting record levels. The iShares MSCI India ETF (INDA) , which tracks the Indian market, is also up nearly 19% in 2024. That would be the fund's biggest annual gain since 2017 — when it jumped 34.5%. It's also outperforming the broader iShares MSCI Emerging Market ETF's (EEM) 16% gain. Several elements drive the India bull market case, including an increasingly tech-savvy banking system, public infrastructure investments and supply chain diversification out of China. On top of that, consumer spending and real estate investments are growing. "India is the best structural story in emerging markets, by far, but potentially in the world at this point," Malcolm Dorson, head of emerging markets strategy at Global X ETFs told CNBC. "The data show that, historically, the Indian market has offered robust returns with reduced volatility." .NSEI YTD mountain Nifty 50 performance this year. The Fed effect Indian equities become even more attractive when accounting for lower U.S. Federal Reserve interest rates, Dorson noted. The Fed last month cut rates by a half percentage point, and traders see further reductions before year-end. Historically, Indian equities move up 3.73% for every 1% decline on the U.S. dollar versus the Indian rupee, according to Global X. (Lower rates tend to put downward pressure on the dollar.) GlobalX also pointed to data highlighting that the MSCI India index averages a more than 27% gain in the six months after the Fed concludes a rate cutting cycle, outperforming other major benchmarks from around the world. Going out 12 months, that increase grows to 38%, based on data going back to 2000. "India does not only better than traditional U.S. asset classes — the S & P 500 , the Nasdaq , the Russell 2000 — but does even better than emerging markets ... it's an amazing compounding story right now," Dorson said. India overtakes China What's more, India — which remains the world's fastest growing major economy — has also moved past China to become the largest emerging market. This year, India overtook China in the MSCI All-Country World Index by country weight. Investors tend to like India's position against China given its higher earnings growth. Dorson expects India to see roughly 6% to 8% earnings growth a year for the next five years, with that high growth being reinvested into profitable projects, he said. They also view India as a defensive play given its friendlier relationship with international governments and its status as the world's largest democracy. The latter makes India more likely to attract foreign investment and be sheltered from global trade war risks. India has also outperformed the broader emerging markets in recent years. Over the past five years, the INDA fund has soared 77.2%, while EEM is up just 16%. Going back to 2015, INDA has seen bigger annual gains and smaller declines than the broader emerging market fund. MRB Partners emerging markets strategist Amr Abdel Khalek is similarly bullish on India's growth. "People need to pay a lot more attention to [India], because it's going to be increasingly a source of demand for the rest of the world, with the young population and people moving from lower class to middle class. So there's a lot of potential there," Khalek told CNBC. He recommends staying overweight on EM stocks within a global equity portfolio, with a preference for non-China exposure. The risks To be sure, investing in India doesn't come risk-free. A headwind for this stock market could come from the U.S., if the Fed cuts rates less than anticipated. Traders anticipate more reductions before year-end, per the CME Group's FedWatch tool. However, Fed Chair Jerome Powell said the central bank may implement smaller rate reductions ahead . Additionally, India faces an income inequality crisis. Barclays analyst Venugopal Garre noted that while the middle class is at a new growth stage, the top 10% of India's population control nearly 50% of the country's national income. "The risk is that employment opportunities fail to shape up as desired, and India's economic progress is derailed by changes in the domestic political environment and geopolitics in general," he said in an early September note. How to play the Indian market Financials are among investors' favorite spots in India's booming stock market. Krishna Mohanraj, a portfolio manager at Diamond Hill Capital Management, called out the country's banks as an attractive space. "You've got three things going on: GDP growth, overall banking system growth and private sector banks growing outsized versus a public sector bank. So you put all those three together over the next decade, it seems like a great place to be in," Mohanraj told CNBC. "And banking valuations are more reasonable than industrials or consumer valuations, so you get the valuation advantage as well." Both Global X's Dorson and Mohanraj named HDFC Bank , ICICI Bank and Axis Bank among their top picks in the Indian financial sector. U.S. investors can buy ADRs for ICICI and HDFC. Axis bank is only available over the counter, however. Dorson said Indian financials are undervalued. These three banks are "high-quality names" that have invested heavily into their technology over the past few years, he said. Growing online banking businesses can also help these bank save on cost by shrinking their physical footprints. Dorson and Mohanraj also like stocks tied to India's domestic infrastructure push, but think some areas of Indian industrials are currently too expensive. "India has been investing aggressively in infrastructure. I don't see any signs of that slowing," Mohanraj said. He named an Australian coal mining name, Whitehaven Coal , as a potential beneficiary of this trend as the company supplies metallurgical coal to the Indian steel industry. India's economic growth and infrastructure development have also made real estate an attractive spot for foreign investment . Along with the continued rapid development of office spaces, the industry's also benefitting from consumers' increased disposable income and desire for larger homes. Within real estate, Dorson likes Prestige Estates Projects . The stock, along with Whitehaven Coal, is available to U.S. investors through over-the-counter shares.
