Indian stocks have had a torrid start to the year, with the Sensex 30 index now around 17% below its January peak. With “blood on the streets”, as Mark Dampier of Hargreaves Lansdown puts it, is this a buying opportunity for long-term investors?
The story remains compelling, with a young, well-educated workforce underpinning a thriving services sector. Moreover, Indian companies are highly profitable, with returns on equity reaching 40%.
India’s comparatively small export sector, comprising just 16% of GDP, should help shield it from an American-led recession: just 1% of exports go to the States, says Brian Dennehy of Dennehy Weller. Growth is largely a domestic story, and the expanding middle class is fuelling consumption. In March, the total number of Indian mobile-phone lines hit 261 million, a far cry from three million in 2000. Valuations are now more reasonable, with the market on a p/e of 17 for this year with earnings growth of around 19% pencilled in.
But the short-term outlook is far less appealing. India’s growth/inflation trade-off “has taken a turn for the worse”, as Capital Economics says. Despite a series of interest-rate hikes in 2006 and more recent increases in the amount of money banks must keep in reserve, inflation is at a three-year high of 7.8%, due to rising food and energy prices.
But tighter money has sent industrial production to a six-year low and dampened credit growth – the main reason why GDP growth is likely to slow to around 7.7% in the year from April, according to CLSA. Slower growth amid monetary tightening and dearer raw materials pose a threat to company profits; it’s going to be “very, very difficult” for Indian stocks to post a sustained rebound, reckons Michael Hartnett of Merrill Lynch.
And while India’s economy may be relatively sheltered, its stocks are vulnerable to selling by foreign investors who have piled in since 2003, says CLSA’s Christopher Wood. So India is affected “more than most” by bouts of global risk aversion. With the credit crunch and global slowdown looking far from over, that’s another reason for caution.