Indian stocks have not joined this month’s party celebrating 60 years of independence; the benchmark Sensex index is down about 6% from its peak, thanks to the global turmoil. But the long-term story remains as compelling as ever.
Growth has been humming along at 8%-9% over the past couple of years and is expected to exceed 8% in the year to the end of next March. The country’s many plus points include a demographic profile superior to China’s, with a quarter of the world’s under-25s and a low reliance on foreign trade. Consumption is booming as the emerging middle class begins to flex its muscles. Six million mobile-phone subscribers are added every month, a faster rate than China’s. Corporate governance is solid and profitability high; firms’ return on equity is over 20%, among the highest in the world, says Rukhshad Shroff of the JP Morgan Indian Investment Trust.
The latest piece of good news, according to Christopher Wood of CLSA, is that the Reserve Bank of India “has pulled off a pre-emptive tightening cycle”. Recent rate hikes should ensure that the domestic credit cycle can last longer “after a healthy pause to refresh” – and the credit cycle, along with the related investment cycle, are the main drivers of India’s long-term bull market. Overall, bank credit growth had been rising by an annual 36% in late 2005; the rate has now been tempered to about 25%. Personal loan growth has declined to 24% from a rampant 57% three years ago. With inflation now close to target, the bank is soon likely to start easing again.
Still, India is vulnerable to rising risk aversion, so further worries over the subprime fallout could take their toll, while a split in the ruling coalition over a nuclear deal with the US – left-wing parties opposed to the deal have threatened to withdraw support – has also damaged sentiment. India also remains pricier than most other Asian markets, on a p/e of around 18. Investors may be able to buy into one of the world’s best long-term growth stories more cheaply before too long.