India Faces a Long Bear Market - Barron's

Down around 55% from its peak a year ago, India's stock market might look like a buy. Far from it, says Barron's. Facing both economic and political challenges, an Indian rebound won't happen anytime soon.

Despite the drop in India's benchmark Sensex, relative valuations remain high. The market's PE ratio, based on expected earnings for the next 12 months, is 60% higher than emerging markets as a group and 72% higher according to its price-to-book ratio. The roughly 2% yield on the Sensex doesn't hold a candle to regional markets offering upwards of 5%. And the 55% decline might not be the end of India's fall; Seshadri Sen, of Macquarie Capital Securities, warns that "it remains to be seen whether the markets have discounted all the bad news that is in store."

India's market cap overtook its GDP in May 2007. By January 2008, it had reached 180% of GDP, extraordinarily high compared to 131% for the U.S. during the dot-com boom and 150% for Japan at its market peak. In July, the market-cap ratio dropped below 100%. What this means is that thought the Indian economy is set to do well over the next two decades, GDP would have to more than double for market cap to return to its previous heights without being part of an equities bubble. If the economy keeps growing at 7.2%, that doubling would take at least ten years.

One of the biggest reasons for the market surge was foreign institutional investments. Since the start of 2008, foreigners have pulled back $20B from the market, according to data from the BSE. The index gained a stunning 200% between 2005 and early 2008 - gains like that are not often repeated. Even more reasonable gains are nowhere in sight. Ridham Desai, of Morgan Stanley, believes a new bull market is at least 15 months away. Desai says the Sensex will probably be down 11% at the end of 2009, but could see a drop of as much as 34%. (In a bullish scenario, Desai adds, the market could gain around 30%.)

According to Citigroup, India is more vulnerable than regional peers when it comes to external financing. Heavy current-account deficit and its debt repayments have hurt the outlook for the rupee, and the already-weakened currency leaves Indian firms that have borrowed overseas vulnerable.

Geopolitics plays a role too. Indians will choose a federal government this year, and must choose between the current party that voters have grown disenchanted with and its major contender which seems to lack a credible leader at the national level. Pakistan's economic crisis could cause investor unrest about the entire region.

If you're still set on investing in India, Barron's recommends picking cheap individual American depositary receipts of Indian companies, including those of Infosys (INFY) and ICICI Bank (IBN).

Comments

[Mar Nev:]

Sure, the Indian market is overvalued but many of the arguments presented in the Barrons article is specious. For example, "gdp growth of 7.2% implies doubling in ten years". Duh - GDP growth numbers are "real" not "nominal" while market cap number is nominal - given typical 5% inflation rate (average over last decade), that is 12+% growth or doubling in less than six years. Also, comparing market cap to gdp ratio of fast growing, developing country like India with developed and barely growing markets like U.S. and Japan is meaningless - a better approach is to compare it to the same ratio historically for India (less than 50%) to show that 180% is overvalued. Otherwise, I could compare the same numbers for Singapore (200%) or Switzerland (200+%) or HongKong (1000+% at the peak) and argue, as speciously, that 180% is cheap! In any case, I am stunned at the quality of financial journalism seen these days...Barrons, what a rag!

Jan 04 06:22 AM

[andyn:]

India and the BRIC countries were indeed in a stock market bubble.
And that bubble has been deflated.

But looking ahead, recognize India is different from other emerging markets in that its a intensely domestic focused economy and still a largely protected one.
Which means that what the shrewd investor needs to see is what is going on internally in India and whether the growth of 5-7% can be sustained.

That seems to be likely since inflation is coming down which means the govt can finally cut interest rates and spur growth. This is doubly beneficial for the ruling Congress party as the elections loom since inflation under 5% bodes well for them in retaining their rule which is extremely bullish for stocks.

India should maintain their 5-7% growth and that is key when compared to the rest of the world (apart from China) which will barely grow. Relatively speaking, investing in India through IBN, HDB, SLT or just a index fund like EPI / PIN would be good.

Jan 04 09:57 AM

[Gavin G:]

I think all the zombie Investment Banks from the western nations want to desperately get into Indian stocks at sensex 7000 levels and hence this negative noise. Reminded of Goldman Sachs prediction about oil hitting USD 200 per barrel when it was at USD 147 per barrel.
Every one knows what happened later.You don't even get an apology from them.

Granby is either a babe in the woods or part of an elaborate gameplan to prevent others from buying Indian stocks. In either case better to treat this article as weekend comedy entertainment.

By January 2010, indian stocks will be in another orbit and all the fundamentals are falling into place again already.
India and China are the only two large economies with decent GDP growth and by April 2009 these two markets should start their rallies again.
With interest rates going down and commodity prices at record lows , things cant be more obvious , can they be ?

Jan 04 10:16 AM

[Gavin G:]

Thanks to Granby honestly, for a good weekend comedy entertainment.

All the zombie investment banks from the USA, Europe... want to desperately get into Indian stocks at sensex 7000 levels. Granby is either a babe in the woods who does not what she is talking or is spitting out a coached version about indian economy.

India is one of the few countries with a real decent GDP growth & with export to GDP ratio at 13% which is one of the lowest in the world.
With interest rates coming down and commodity prices at record lows, Indian stocks should be in another orbit by January 2009.

Jan 04 10:25 AM

[Gavin G:]

Sorry I meant January 2010


On Jan 04 10:25 AM HR wrote:

> Thanks to Granby honestly, for a good weekend comedy entertainment.
>
>
> All the zombie investment banks from the USA, Europe... want to desperately
> get into Indian stocks at sensex 7000 levels. Granby is either a
> babe in the woods who does not what she is talking or is spitting
> out a coached version about indian economy.
>
> India is one of the few countries with a real decent GDP growth &
> with export to GDP ratio at 13% which is one of the lowest in the
> world.
> With interest rates coming down and commodity prices at record lows,
> Indian stocks should be in another orbit by January 2009.

Jan 04 10:27 AM

[j_remington:]

IBN is "cheap"? How so? What a cheap pump job.

Jan 04 11:46 AM

[donzelion:]

Seems to me that Indian equities warrant slightly greater multiples than other neighboring emerging markets - Indian equities offer significantly greater prospects for transparency than, say, Thai, Chinese, Malaysian, Indonesian, or other regional markets, and hence, a lower yield is reasonable.

Note that a "prospect for transparency" is not the same as transparency, but at least the public can learn about issues at a Tata plant months before the first Nano is supposed to come off the assembly line, and a potential insider deal at Satyam gets printed. In China, you tend to learn about issues after thousands of children get sick.

Jan 04 03:51 PM

[khuf:]

The India economy is a Frankenstien economy created by the global financial institutions with the idea that if you flood a region with enough FDI and add artificial competative advantage it will create a consumer economy.
American innovation and entrepreneurial is unique across in world and across history. It cannot be bought.
The downturn will puncture the myth of India knowledge competencies. Other then one campus of IIT, which may be the best university without a research department, India does not have a single University that would compare with an average state university in the US.




The World Knowledge Competitiveness Index (WKCI) from the Centre for International Competitiveness and the Global Competitiveness Report from the Institute for Strategy and Competitiveness founded by Micheal Porter rank India at the bottom in knowledge competitiveness.


A McKinsey global labor market study
concluded that only 10% of Chinese engineers and 25% of Indian engineers can compete in the global outsourcing arena.
www.expressindia.com/n...


A study done by Duke University on outsourcing found that the number of engineering graduates in India and China is vastly overestimated and traced the origins of this false information to organizations such as National Association of Software and Service Companies of India who often include technical trades such as auto and bicycles mechanics when estimating the number of engineering graduates in India.

www.soc.duke.edu/resou...
Links:
us.macmillan.com/thegl...
www.rediff.com/money/2...
www.isc.hbs.edu/
www.mckinsey.com/mgi/p...

Jan 04 05:51 PM

[khuf:]

Investors should consider moving thier investments to Polaria. It has all the advantages of the BRICK countries plus one more. If you calculate carefully you will see that GDP in polaria should exceed that of any BRICK country.

- Polaria is not required to comply with international private property rights and can use the US patent office as an idea bank and US products as templates for building their own products.

-Polaria is expected to get 70 billion in FDI in 2009

- Polaria has created its own currency, the Yupy, which it has pegged to
the dollar.

- US companies do not have to pay taxes on profits in Polaria and can
write down manufacturing cost in Polaria as R&D cost.

-Polaria receives 10 billion a year in in foreign aid created by taking food
out of the mouths of the dying children in Africa and used for the purpose of creating an artificial upper class (caste) that can ignore the miserable conditions in which its poor live.

- Polaria does not receive international scorn for behaving badly and
can implement high duties for imports.

- Polaria does not have to implement any environmental policies. If a
factory relocates to Polaria, it is free to pollute the worlds land, air,
water as much as it wants.

- Polaria does not need to comply with international human rights laws.

- Polaria can subsidies it products.

-POLARIA IS LOCATED IN THE SOUTH POLE AND SO IS IN EVERY TIME ZONE

Jan 04 06:11 PM

[southernbil...:]

Barron's research is BS. The company wasn't even present in India until a couple of years back. To make forecasts based on a couple of years of experience is asinine. May be it will be a better idea to keep our predictions aside (since we haven't done so well in predicting economic events recently) and watch and learn how a developing economy recovers will be a more valuable experience. It will be foolish to attach much value to Barron's 'unresearched' projections.

Jan 04 08:35 PM

[Adityaa:]

Journalists, like investors, are prone to overreaction - when the markets are exploding, and when they are crashing. Fortunately for the astute, their advice is never timely, authentic or profitible.

The truely wise and insightful investors don't write for profit, because they earn their money the old fashioned way.

Come on, Barron's! You can do better than this.

Jan 05 02:35 PM

[Gavin G:]

The funny part is when market cap to GDP is at about 55 % for India as presently , all this negative noise by media and investment advisors.
If you follow these guys , you will always enter at market tops and get out at market bottoms. Anyway this is what they want you to do.




On Jan 05 02:35 PM Adityaa wrote:

> Journalists, like investors, are prone to overreaction - when the
> markets are exploding, and when they are crashing. Fortunately for
> the astute, their advice is never timely, authentic or profitible.
>
>
> The truely wise and insightful investors don't write for profit,
> because they earn their money the old fashioned way.
>
> Come on, Barron's! You can do better than this.

Jan 06 09:18 AM

[Kevin B.:]

Ill keep taking my tax free (ROTH) distributions from the IFN and let you know how much its worth in 20 years. Ingore the noice from big brokerage/research firms. Odds are I will have a disgusting large sum of money. India's GDP will be growing far faster than the U.S. So call me silly but I will take growth, distributions and upside potential any day. Especially after the recent world market declines.

Jan 09 05:10 PM

[ajit:]

analyst r paid.
one must study multiple study & then to come conclusion.
we have to see Obama effect now.
Indian market may go down but it will fast recover to todays point again

Jan 24 11:11 AM