Over the past 15 months India’s stock market has risen more than 70%, but strong share price returns over relatively short time periods are not unprecedented in the Indian context. The most recent rise however, appears to have moved the market out of its long-term trading range, reflecting an appreciation of the improved growth environment.
The rise doesn’t appear to be excessive either, as it has been supported by strong earnings growth and price/earnings multiples at 15 times remain reasonable versus a long term average of 18.4 times. This suggests that the index has lagged economic and profit growth rates, and in this context, the present move can be seen as the index catching up.
There are a number of long-term fundamentals which support continued, sustainable growth in the country:
• India has a vibrant equity market with attractive opportunities for stock selection given the large number of listed companies and breadth of industry representation. This is set to continue as the market expands and new sectors and companies continue to emerge – some of which will be the success stories of the future.
• The Bombay Stock Exchange is amongst the five largest stock exchanges in the world in terms of number of transactions, and has a market capitalisation of approximately $450bn. It has over 4,700 companies listed (second only to the NYSE) and has the largest number of US and European MNC listings compared with any other emerging market, reflecting India’s entrepreneurial spirit. It also has impressive market depth, with the top 100 companies accounting for only 32% of total market capitalisation.
• Foreign investment is concentrated in large cap companies with almost 50% of overseas ownership in companies with market capitalisation over $5bn. In contrast, investment in smaller companies of $250m or below is just 3%. It is also concentrated in better known sectors with more than 40% in banking and technology. This leaves an abundance of opportunities among lesser known smaller companies and emerging industries.
• Historically, high interest rates have led domestic investors into government bonds and bank deposits. In 2004 only 1.4% of household savings were in equities. A lower interest rate environment, together with rising incomes and urbanisation, bodes well for increased equity participation from domestic investors.
A long-term approach is key. Investors must be prepared for volatility over shorter time frames but secular growth trends are supportive of further expansion of the Indian equity market.
By Arun Mehra, Head of Investment Strategy at Fidelity Internationa