Indian Market Is Still Attractive

By Neena Mishra

The Indian Stock Market has gone up sharply in the recent weeks based on high expectations from the re-elected United Progressive Alliance government, (this time with a record mandate), which promised to bring about high economic growth by opening up foreign investment and boosting infrastructure spending.

The Bombay Sensex is now at around 15000, almost double from the bottom hit in November 2008. The rally has been broad-based, with shares of Indian ADRs of software companies like Infosys (INFY) and Wipro (WIT), banks like ICICI (IBN) and HDFC (HDB) and automobile companies like Tata Motors (TTM) up sharply.

Foreign institutional investors (FIIs) have invested more than $5 billion (over Rs 25,000 crore) in Indian stock markets so far this calendar year, with as much as $3.2 billion coming since the UPA government came to power last month, which is one of the main reasons for the rally. The FIIs have been pouring money in the Indian markets on the improved political situation and signs of recovery in the economic situation worldwide.

The focus has now shifted to the new government's budget, slated for early July, which will indicate to a great extent whether the current market optimism is justified or if the market is getting ahead of itself.

However, given the worsening fiscal situation (the level of central government debt at almost 60% of GDP, which is much higher than most emerging Asian economies), the Government's ability to pass a large stimulus package is rather limited.

The Government also has to move fast on the reforms promised during the elections. Some of the areas that need urgent attention are infrastructure, social sector and financial sector reforms. Poor infrastructure is regarded as the major constraint in India's performance. Also, there needs to be positive movement on social sector reforms in view of high levels of poverty and illiteracy.

While worldwide there has been a rethinking on financial sector liberalization after the crisis -- especially related to liberalization of the capital account and an expansion of unregulated financial sector -- in India's case, there is a lot of room for opening the financial sector while continuing to carefully regulate it.

Among other reforms in the pipeline opening up to more foreign investment are retail, insurance and banking sectors, and reducing Government ownership in refineries, banks and fertilizer companies.

Although the Reserve Bank of India in its annual monetary policy in April forecast a growth rate of around 6% for the current fiscal year, Prime Minister Manmohan Singh said recently that the growth rate would be at least 7%, and with efforts the country can revert to 8-9% economic growth in the medium term. The economic growth during 2008-09 dipped to 6.7% from 9% a year ago, due to the impact of the global financial meltdown.

A stable political situation, prospects for high economic growth and reforms make the Indian markets still attractive as the valuations are reasonable. Further, democracy, independent judicial systems and transparency make India preferable to some other emerging economies. Moreover, Indian domestic consumption has been increasing sharply in recent years.

We anticipate the markets to continue on the positive note. There may be occasional profit-taking given the sharp rise in the recent weeks, however, so
investors should buy on dips.

Comments

[Mad Hedge F...:]

attractive is an understatement. I couldn’t help but laugh when I saw my old colleague from Morgan Stanley, Stephen Roche, on CNBC today. The current chairman of Morgan Stanley Asia (MS) is bearish on the economy and sees no chance of a “V” shaped recovery, just a very weak one at best. There are no “green shoots”, they’re still underground. “The consumer is toast”, he averred, and he expects consumer spending to plummet from a record 72% of GDP to 67% in five years. Because a massive external deficit has to be funded by foreigners, the outlook for the dollar is “down, down, down.” There won’t be a crash, just a gradual decent, as we have seen for the last 38 years. China isn’t going to bail us out. The US has only 4.5% of the global population, but accounts for $10 trillion of consumer spending. China and India together have 40% of the population, but only spend $2 trillion. This disparity is 50:1. Steve was an early BRIC fan, like me, and since China is so overbought short term, India is his first pick. You want to buy countries that have to build infrastructure and a middle class, and China has already done that. India’s recent election of a more pro business government is the trigger. I aggressively pushed India at the beginning of the year (www.madhedgefundtrader...), and it has doubled since then. The humorous thing about all of this is that Steve has been spouting the same perma bear line for the US for 15 years. The in-house joke at MS was that he was sent to China because his bearish sentiments were scaring the firm’s conservative US institutional investors. Given the performance of the BRIC’s since then, it is Steve having the last laugh.

Jun 16 06:49 PM

[Subhankar:]

The Congress party that leads the UPA alliance has been in power for most of the 62 years since India gained independence from Britain. During all those years, they followed socialist principles with large state owned industries and major banks, oil exploration and distribution, coal mining, electricity generation and distribution, railways, ports all under government control.

Long ago, the ex-CEO of Tata Steel had said: the Government has no business to be in business. Things haven't changed much except superficially. There are pockets of prosperity - around big cities and a few states. The rest of the country still lives in medieval conditions.

It is very unlikely that the upcoming budget will be able to right 6 decades of wrongs. The stock market is expecting magic - but it will all be illusory.

Jun 17 01:53 AM

[HaavBline:]

You captured Steven Roach's comments on CNBC very accurately. His gloomy views made our cheerful CNBC crew rather uncomfortable.

Roach has been underappreciated in the US for a long time, probably because he is just not so 'media-savvy'. But he is very well respected in Asia.


On Jun 16 06:49 PM Mad Hedge Fund Trader wrote:

> attractive is an understatement. I couldn’t help but laugh when I
> saw my old colleague from Morgan Stanley, Stephen Roche, on CNBC
> today. The current chairman of Morgan Stanley Asia (seekingalpha.com/symbo...)
> is bearish on the economy and sees no chance of a “V” shaped recovery,
> just a very weak one at best. There are no “green shoots”, they’re
> still underground. “The consumer is toast”, he averred, and he expects
> consumer spending to plummet from a record 72% of GDP to 67% in five
> years. Because a massive external deficit has to be funded by foreigners,
> the outlook for the dollar is “down, down, down.” There won’t be
> a crash, just a gradual decent, as we have seen for the last 38 years.
> China isn’t going to bail us out. The US has only 4.5% of the global
> population, but accounts for $10 trillion of consumer spending. China
> and India together have 40% of the population, but only spend $2
> trillion. This disparity is 50:1. Steve was an early BRIC fan, like
> me, and since China is so overbought short term, India is his first
> pick. You want to buy countries that have to build infrastructure
> and a middle class, and China has already done that. India’s recent
> election of a more pro business government is the trigger. I aggressively
> pushed India at the beginning of the year (www.madhedgefundtrader...),
> and it has doubled since then. The humorous thing about all of this
> is that Steve has been spouting the same perma bear line for the
> US for 15 years. The in-house joke at MS was that he was sent to
> China because his bearish sentiments were scaring the firm’s conservative
> US institutional investors. Given the performance of the BRIC’s since
> then, it is Steve having the last laugh.

Jun 17 02:44 AM