After yet another rip-roaring year in 2007, when the MSCI India index managed a 71% gain, many investors had high hopes for this year. The country’s strong domestic economy and relatively small export sector – consumption accounts for around 60% of GDP and exports about 13% – would help insulate the market from global storms, the thinking went.
But the market, if not the economy, is clearly far from immune to global jitters. As worldwide risk aversion has risen amid the darkening US outlook and ongoing credit turmoil, the benchmark Sensex index has lost about 30% from its January peak above 21,000 and is Asia’s worst performer so far in 2008.
Foreign funds, the most influential class of investors in India, have pulled out $3.2bn so far this year, having pumped in $55bn over the past seven years, says V. Phani Kumar on Marketwatch.com. The main problem is that some of the shine has come off the Indian growth story. India’s leading software and outsourcing firms have been hurt by the slowdown in the US and the weakening dollar, while high interest rates, due to persistent inflationary pressure, have led to a rise in defaults on personal unsecured loans. This has made banks more conservative in their general approach to lending. Overall loan growth has slid to 20% this year.
Industrial production growth unexpectedly fell to 5.3% in January, after eclipsing double digits for most of last year as demand for consumer durables eased, thanks to higher interest rates. GDP growth – 8.7% in the year to 31 March 2008, according to the Government – may ease to 7% this year. Meanwhile, inflation has risen to a ten-month high above 5%, so rate cuts look unlikely for now.
There will always be setbacks, a major industrialist told FAZ.net, but “India’s upswing is just beginning”. The long-term story is compelling, as we have often pointed out in MoneyWeek. A young, well-educated population (India is home to 25% of the world’s under-25s) is underpinning a thriving services sector, and despite rocketing consumption growth there is ample scope for more as the middle class expands. There are still only around 16 credit cards, eight cars and four internet connections per 1,000 people, Vijay Tohani of the First State India Sub-Continent fund told The Daily Telegraph.
The government has earmarked $400bn-450bn to improve infrastructure. Arun Mehra of Fidelity’s India Focus fund says India is capable of growing by at least 7% for at least the next five years. Note too that there is still plenty of room for local investors to play the stockmarket: only 6% of household savings are currently channelled into equities, says ICICI Bank.
But does buying now make sense? Kumar notes that most analysts are pencilling in earnings growth of 15% in the year beginning in April, making the market look reasonable on around 16 times these estimated profits. But further earnings downgrades are likely this year with the US in recession, says Deutsche Bank, which has slashed its March 2009 Sensex target by 26% to 18,000.
Sentiment has soured as both domestic and global growth are slowing, notes Shubha Ganesh of India’s Economic Times, and seems unlikely to recover soon. And given the high correlation of the Indian market with the rest of the world, it will “continue to be at risk until global markets stabilise”, says Morgan Stanley. With the near-term outlook uninspiring, there are likely to be better buying opportunities ahead.