We’ve heard a lot about trading being stopped on various stock exchanges over the past six months or so, usually as markets fell through the floor on the latest piece of bad news.
Yesterday, trading on India’s benchmark stock index, the Sensex was stopped for the first time in its history. But in this case, it was because stocks went too high.
The Sensex leaped 17%, while the rupee gained the most in 20 years, as the ruling Congress Party won a resounding victory in the national elections.
So why the euphoria – and is now the time to snap up some stocks in India?
The election result should be good for India’s economy
Our own Gordon Brown and even the popular Barack Obama must be feeling a touch envious of Indian Prime Minister Manmohan Singh this week. His victory in India’s election has sent markets rocketing and sent a wave of optimism flooding through the country that our own leader can only dream of.
Everyone had feared that the latest election would lead to a hung parliament. That of course, tends to mean general paralysis in government, and a lot of horse-trading and deal-broking and general instability for the population.
But instead, Singh’s Congress Party won the most seats since 1991, which was when Singh, as finance minister, introduced various free market reforms “that have helped India’s economy “quadruple in size”, reports Bloomberg. The hope is that the government will be able to push through plans to “further reduce barriers to foreign investment” now that it won’t have to look to political rivals such as India’s communist parties for support. In short, as Madhusudan Kela of Mumbai-based Reliance Capital Asset Management tells Bloomberg, “this will provide a government which is stable and has powers to take decisions.”
David Fuller of the excellent Fullermoney service has described India as his favourite stock market for the very long term (although he likes China too), with strengths including its “low average age of workforce” and a lower “reliance on exports”. And, he says, “in theory, this [election] should be very good for India’s economic prospects, helping to break many of the logjams that have so frustrated both businesses and investors in recent years. Consequently, India should be able to rival China in terms of global GDP leadership among larger nations.”
But India still faces a lot of problems
But amid all the euphoria, it’s worth getting a bit of perspective here. India, like the rest of the world, is still stuck in the biggest global recession seen in the past 60-odd years. As Credit Suisse points out, the election victory will probably result in a lot more foreign investment, but “global markets, monetary and fiscal constraints, and data disappointment” might halt the rally.
India still faces a lot of problems. Both the energy and transport infrastructure are unreliable and congested – Capital Economics points out that the average manufacturer in India loses about one-tenth of potential output to power shortages, against a fiftieth in China and Brazil. And absolute poverty is also far higher than in China, for example. The World Bank reckons that about 40% of Indians live on less than $1.25 a day.
The country also has a hefty government deficit, at 10% of GDP, as Cris Sholto Heaton pointed out in a recent MoneyWeek Asia email (Why India’s not safe from the global recession). With ratings agencies threatening to cut India’s already weak credit rating (it’s just a notch above ‘junk’), this is something that will have to be tackled, and it limits any big spending plans the new government might have.
It’s also never a great idea to put a lot of faith in what governments can actually do. The bounce has pushed up all sectors, in the hope of structural reform across the economy. But after the honeymoon wears off, investors might find that the pace of actual reform is a lot slower than they’d like.
So is it time to invest in India?
However, overall, this looks like good news for India – and if Singh lives up to expectations, it might even be a “game changer,” as Indian investment adviser William Nobrega puts it. But there’s every chance that the market will take another pounding when the next global scare comes. And with the recent big leaps, the Sensex will probably naturally come off somewhat over the next week or so – it’s up by nearly 50% in the year-to-date.
However, if you don’t already have some exposure, now’s not a bad time to get in for the long run. It’s hardly dirt cheap, trading at 15.6 times earnings, but that’s still lower than both China and Brazil. Two investment trusts worth a look are the JPMorgan Indian Investment Trust (LSE:JII) and the Aberdeen New Dawn Investment Trust (LSE:ABD).
Our recommended article for today:
A junior mining share worth watching
Tom Bulford profiles an Irish mining company that has some solid reasons to be cheerful. And while nothing in the mining industry is ever certain, this is a share that could see some action.