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India’s stock market, the Sensex, is close to a record high – as usual.
Despite a sharp sell-off last May, when the Sensex lost a third of its value, the market rapidly regained its poise, and ended up closing the year on a gain of nearly 50%.
In fact, the market has more than quadrupled since 2003. That’s a pretty attractive return – and with most people apparently now largely buying into the story that China and India will be the world’s new superpowers by around 2050, it’s small wonder that investors are piling in.
But can this continue? Or should investors wait for another correction before considering investing in India?
George Soros, on a trip to India in December, said: ‘The markets clearly are heated, but I can’t say if they’re overheated or not.’
However, his additional comments suggest investors should certainly be wary. ‘India is the flavour of the month, but flavours are not everlasting.’
India certainly is popular with foreign investors. Forbes points out that ‘India has been one of the biggest beneficiaries of foreign investment flows, receiving an estimated 25% of total portfolio flows into emerging markets.’
The trouble is, as Soros implied, foreign investors can be a fickle bunch. As Forbes points out ‘portfolio flows can reverse suddenly and without warning.’ This is what happened in May and June 2006, when the Sensex fell 29% from its high to its low, before recovering to make new highs by the end of the year. But those new highs have again been driven by foreign investors – ‘net investment by foreign institutional investors in Indian equity markets rose to a record high $2.04bn in November.’
It is almost certain that any nasty surprises or tightening in global liquidity could well see another rush by foreign investors to repatriate money somewhere less risky. And that would almost certainly mean another extensive correction for the likes of the Sensex.
One of India’s problems is that, partly because of all that foreign investment, its economy is looking distinctly bubbly. Apart from the booming stock market, house prices have rocketed, while consumer price inflation is running at around 6% to 7%. A shortage of skilled labour and dreadful infrastructure means that rapid economic growth makes the economy much more prone to inflation than China’s as spare capacity is rapidly used up. As Soros added: ‘A lot has to be done in terms of infrastructure to attract more foreign direct investment.’
As my colleague Cris Sholto Heaton pointed out in December, these points combine to make India ‘the world’s most vulnerable emerging market.’ You can read more on the country’s heated economy here: The world’s most vulnerable emerging market
Of course, there are also ways to take advantage of the infrastructure squeeze. Restraints on the ability of India’s economy to keep growing at the current rate means companies have problems growing organically. Recent surveys already suggest that the economy has very little spare capacity.
If companies can’t grow organically, there’s one obvious way to solve the problem – buy other companies. And with foreign investors and private equity looking all over India for new opportunities, there are plenty of funds available for Indian companies who want to go on the acquisition trail.
And with India spawning more and more multinationals, it’s not just local companies that look set to be taken out. Plenty of foreign companies could well find themselves in the sights of ambitious Indian firms.
There’s more on this, and some tips on the kinds of companies which could find themselves targeted, in a recent issue of MoneyWeek. Subscribers can read the piece here: How to profit from India’s M&A battle
And if you’re not a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the stock markets…
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In London, the FTSE 100 gained 26 points points on Friday to end the day at 6,237. The index of leading shares climbed as high as 6,243 in afternoon trading as it was boosted by strength on Wall Street and bid activity. Continued bid speculation surrounding InterContinental Hotels Group saw the company top the FTSE leaderboad. For a full market report, see: London market close (/file/24348/london-close-bid-interest-buoys-footsie.html)
Across the Channel, the German DAX-30 climbed 57 points to close at a six-year high of 6,747.
On Wall Street, positive economic data offset weakness in the tech sector triggered by concerns over IBM‘s hardware business. The tech-heavy Nasdaq ended the day 8 points higher, at 2,451. The broader S&P 500 was 4 points higher, closing at 1,430. And the Dow Jones ended the day 2 points lower, at 12,565.
In Asia, the weaker yen helped the Nikkei to a close of 17,424, a 113-point gain.
Crude oil was nearly 1% higher this morning at $52.50. In London, Brent spot was also substantially higher, at $53.86 a barrel.
Spot gold had climbed to $635.30 overnight, whilst silver was relatively unchanged at $12.80.
And in London this morning, publishing group Pearson announced that it is expecting to report ‘record profits’ this year after a strong performance throughout the year. However, investors had hoped that the company would comment on potential bid interest from private equity. Pearson shares were down by as much as 2% today.
And our two recommended articles for today…
Why did the Bank of Japan keep rates on hold?
– There are few reasons for financial market operators to stay up until 3.30am, but Jeremy Batstone thinks the Bank of Japan’s interest rate decision might have been one of them. To find out why the central bank resisted pressure to raise rates – and why this freeze is so significant – see: Why did the Bank of Japan keep rates on hold?
The risks and rewards of investing in 2007
– Economic optimism is well-founded in 2007, says Brian Durrant, but the geo-political risks are heightened. To find out where the greatest threats – and opportunities – lie in 2007, read: The risks and rewards of investing in 2007