|Summary: Is India the new China? After a horror period last year, during which the Indian stockmarket fell almost 30% as investors pulled out their capital, the Indian market has staged a complete turnaround. Investors are warming to the Indian subcontinent, with the recent election of pro-business Narendra Modi as the country’s Prime Minister designate.|
|Key take-out: Indian has enormous economic potential, however investors should be cautious. Sentiment could turn negative if economic reforms don’t match market expectations.|
|Key beneficiaries: General investors. Category: Economic and investment strategy.|
Almost as quickly as it lost it, India has snapped back into investor focus. For the first time ever, the second most populous country in the world has elected a pro-business government, ushering in a period of significant economic reform.
Newly-elected Narendra Modi, the leader of the Bharatiya Janata Party (BJP), is likely to target reforms that focus on privatisation, reducing the budget deficit and improving the business environment. Economists believe these initiatives could propel India’s growth potential back to around 8% per annum.
But what does it mean for investors? Below our colleagues at Barron’s offer a global perspective on the Indian stockmarket in the light of pending reforms from the Modi regime. Over the next 12 months India may rival China for investor attention. We reproduce this piece not as Eureka recommendations but as a useful macro-view on what may become one of the world's exciting economies in the months ahead. (James Kirby, Managing Editor)
Investors should stay focused on key themes, including infrastructure and India’s rising middle-class, in assembling an India portfolio.
Investors’ feelings about Indian stocks tend toward the extremes of a Bollywood blockbuster, swinging between utter despair and unfettered euphoria. Sentiment hasn’t quite reached giddiness, but let’s call it happy and hopeful.
After pulling $US7.8 billion out of Indian equities over the previous 12 months as economic growth slowed, global investors put money back into the market last month, according to the data researchers at EPFR Global. The S&P BSE Sensex, India’s major stock index, fell 26% from the beginning of 2013 to an August low, in US dollar terms. It has since rebounded 39%, hitting a record high in April; and it’s up 9% in 2014, aided by renewed interest from foreign investors. Goldman Sachs, for example, told clients in March that Indian equities merited an “Overweight” in global portfolios.
So where will these foreign funds go? When Narendra Modi and his Bharatiya Janata Party (BJP) end up in power, investments in infrastructure to modernise India’s inefficient transport system will rise, and businesses generally will be freed from bureaucratic entanglements.
Pushed by government spending and guided by Reserve Bank of India Governor Raghuram Rajan, the economy seems poised for a cyclical rebound that will aid India’s rising consumer class. “It could be the start of a new bull cycle,” says Nikhil Bhatnagar, vice president of South Asia equities at Auerbach Grayson. He thinks economic growth, which fell to 4.7% in 2013 – about half of 2011’s rate – could rise to 6.5% by 2016, outpacing China’s expansion.
Indian stocks tend to trade at higher valuations than those of other emerging markets, because of the depth of the markets and the large number of well-run companies. The Sensex trades at 14.7 times forward earnings, above the emerging-markets’ overall average of 10 times but below its historical median of 17.
There are several ways to play India’s revival. For those who want broad exposure, there are a handful of suggested mutual and exchange-traded funds. The $US463 million Matthews India returned an average of 17% a year over the last five years, topping its Morningstar category. Matthews India searches among companies of all sizes to find those that seem to have sustainable growth prospects. One of its key themes is Indians’ rising income over time.
Then there’s the WisdomTree India Earnings fund, which is the broadest and oldest ETF focused on India, and has a bigger helping of energy, consumer staples, and materials companies than its benchmark, the MSCI India index. The iShares India 50 ETF (INDY) tracks an index of 50 blue-chip Indian companies.
Investors also can find opportunities among large cyclical companies. Auerbach’s Bhatnagar recommends infrastructure lender IDFC, which would benefit from increased funding for modernisation projects. Its shares trade at eight times forward earnings.
ICICI Bank, one of the country’s largest private-sector banks, is a good proxy for the overall economy, particularly consumer borrowers, who will presumably do well as the economy regathers speed. ICICI trades at 13 times forward earnings.
Automakers, which have been hurt by high inflation and sluggish demand, could rebound with the economy, says Richard Titherington, who oversees $US48 billion in assets as chief investment officer for emerging market equities at JPMorgan Asset Management. Motorcycle maker Bajaj Auto, which trades near its long-term average at 14 times 2015 earnings, could gain a new generation of riders. Earnings could rise 11% a year over the next few years, he notes. Another favourite, Mahindra & Mahindra, has been able to increase net income despite the stall in the economy. The stock trades at about 13 times 2015 earnings and should average 15% earnings growth over the next couple of years, Titherington says.
Matthews India lead manager Sunil Asnani says some reforms already are under way that could spur growth. For example, India is creating a dedicated freight corridor that tackles the country’s dilapidated infrastructure. Shipping and logistics firm Gujarat Pipavav Port is one of Matthews India’s holdings.
Following the recent run-up in the market, Asnani says he is finding more opportunities in small- and mid-size companies, which are more attractively priced than large-caps, based on their profit and growth prospects. The S&P BSE Small-Cap index, for example, is still 46% below its January 2008 high, while the Sensex is setting records.
One possibility, Shriram Transport Finance, the country’s biggest commercial vehicle lender, trades at a discount and has a stronger balance sheet than many of its peers, according to David Nadel, manager of the Royce International Smaller-Companies fund. Nadel, who’s been raising his Indian position in the last year, likes that Shriram’s loan officers live in the same communities as their borrowers. He expects it to gain from economic growth, as well as increasing credit usage in a country where fewer than 20% of the citizenry have loans.
Goldman and the others realise that Indian stocks historically have rallied before elections, propelled in part by foreign investment. Sentiment could turn back toward despair if poll results take an unexpected turn or the pace of reforms is slower than anticipated. But even that could be short-lived. “History teaches you to be sceptical of the government’s ability to deliver on the hype. We think the economy will do better anyway and think they have made the right monetary policy decisions that set the foundation for strong performance,” says Titherington.
Any bouts of melodrama could offer opportunity.
This article first appeared in Barron’s on May 3 and is reproduced with permission. The comments published are not financial product recommendations and may not represent the views of Eureka Report. To the extent that it contains general advice it has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.