I had earlier written about the rising risks of investing in the Indian markets. Most market analysts have ignored the problems due to the social and economic issues as well as the increasing corruption. One of the major risks I had cited was the elections that are due to be held in 2014. It seems that some of those risks are now coming true. A crucial government ally has abandoned support leaving the ruling Congress party to depend on the fickle outside support from two Uttar Pradesh based regional parties. What has made the ruling coalition shakier is that these parties - SP and BSP - are strongly opposed to each other. The stock market has fallen sharply due to this unexpected development despite a 25 bps cut in the interest rate by the Indian central bank. I think that investing in Indian markets through ETFs will result in no gain at best and a big loss at worst. Here are some other factors that will lead to the Indian markets remaining range bound throughout the year.
- Governance Deficit - The Indian government seems to be caught in an endless loop of corruption scandals. The latest one due to an Italian government investigation into bribery allegations by the Agusta Westland group. As usual there is a lot of mainstream media noise without anyone being the wiser.
- The ruling UPA alliance gets weaker and weaker - The ruling UPA alliance is getting weaker and weaker as elections draw closer. First one of their biggest regional allies Trinamool Congress abandoned the alliance because they weren't getting enough sops from the federal government. Now their 2nd biggest ally DMK has used the issue of Sri Lankan Tamils to withdraw support to the Congress. The real reason is that Congress has become quite unpopular throughout the country. DMK sees the Congress alliance as a liability and has used the excuse of Tamil solidarity to go alone.
- Business Sentiment is as Bad as ever - The sentiment amongst the business community remains as bad as ever. While business sentiment in Asia as a whole has gone up, Indian sentiment has gone down. Despite promises by the Prime Minister, past investments are not being fast tracked and the regulatory regime in most sectors remains a big mess. There were some hopes of a revival with the appointment of a new Finance Minister and some token reforms, but that hope has faded now. Investment by private companies has almost halted and existing projects remains mired in delays. The bureaucracy has stifled clearances while an activist judiciary is scaring the hell out the business community.
- Stagflation has become real - India's chairman of the economic advisory council has said that India is now facing a stagflation situation. I have been saying that for a long time. While the Indian GDP growth rate has more than halved to the 4.5% level right now, the inflation has increased to double digits. The central bank under pressure from the finance ministry has reduced interest rates. However, RBI is reluctant to decrease rates further because of the high food and energy inflation. India is a low income country with hundreds of millions of poor. It cannot afford high food inflation which could lead to the starvation of the vast majority of its citizens.
India's benchmark BSE Sensex has fallen below 19,000 after hitting a high of 20,000 a couple of months ago. India's forward P/E ratio has now declined to ~15x, which is on the lower side of its historical valuation range. The Indian stocks have performed quite abysmally compared to other Indian asset classes like real estate, debt as well as gold. Retail investors have mostly abandoned the stock markets because of rigging and manipulation.
How to invest in the Indian markets
There are some good Indian ADRs listed on the US markets which one might look to invest in. Investors are advised to do their own due diligence before investing in these ADRs. Here is a list of these Indian ADRs:
ICICI Bank (NYSE:IBN)
HDFC Bank (NYSE:HDB)
Tata Motors (NYSE:TTM)
I would not advise anyone to buy Indian market ETFs right now, but if someone has a contrary opinion they may look to invest in the following ETFs:
- Wisdom Tree India Earnings ETF (NYSEARCA:EPI)
- iShares S&P India Nifty Fifty Index Fund (NASDAQ:INDY)
- PowerShares India Portfolio (NYSEARCA:PIN)
- EGShares India Infrastructure ETF (NYSEARCA:INXX)
- EGShares India Small Cap ETF (NYSEARCA:SCIN)
- EGShares India Consumer ETF (NYSEARCA:INCO)
The Indian market has come down by almost 6% since the benchmark BSE touched the crucial 20,000 level. The market has started to discount some of the risks that I have described above. The misplaced optimism about India being able to return to the high growth rates of the global credit boom era is now giving a more realistic assessment. The government is now mostly a lame duck, one which will not be able to take any crucial reforms till the next elections. There is also a danger that it might indulge in giving greater subsidies and sops to woo the poor vote bank. The new food subsidy bill has been passed by the Cabinet despite protests from the agricultural and finance ministries. The current account deficit remains stubbornly high and there is a very real fear that the Indian currency might crash in case the economy takes a turn for the worse. I would avoid investing in the Indian markets in 2013 as there does not seem to be any upside but there exists a potential for a big downside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.