“It’s been one breathless run,” as India’s Economic Times puts it. The benchmark Sensex index is up by 14% in 2010, and only a shade below its 2008 record peak. In September alone, stocks climbed by 11%. The economy is expected to grow by 8.5% in the year to April, and “the nervousness about the strength of the recovery” in the West “has cast a favourable light on the strong domestic component of India’s story”.
With only 15% of GDP derived from exports, India is far less exposed to the global cycle than most Asian economies. An “emergent consumer class with buying power” is increasingly powering growth, says Patricia Ribero of American Century Investments. For example, 120 million people sign up to a mobile-phone contract each year.
Indian companies are more profitable than their Chinese counterparts, while India’s demographics also bode well long-term. By 2020 another 136 million people will have joined the workforce, as opposed to 23 million in China, thanks to the one-child policy, says Graeme Davies in the Investors Chronicle. One area that still needs improvement, however, is India’s “creaky”, infrastructure, as news from the Commonwealth Games shows.
So the long-term picture remains compelling, but for now the market looks increasingly vulnerable to a setback. Stocks are on 19 times forward earnings, compared to a long-term average of 16, according to Saurabh Mukherjea of Execution Noble. Indian shares tend to be very volatile, over-extending on the upside when global liquidity and sentiment are robust, but sliding sharply when these change, notes Joe Leahy in the Financial Times. In 2006 the market fell 30% in six weeks. With the rally driven by foreign rather than retail investors, another European debt scare or jitters over global growth could lead to a sharp reversal.
The discounts to net asset value of the JPMorgan Indian and the Aberdeen New India investment trusts, two possible ways into India, have narrowed sharply of late, so it may be worth waiting for the next dip. In the meantime, an Aim-listed India share worth a look for the long term is Eredene (LSE: ERE), a group that invests in infrastructure and real-estate projects around India. It is on a 17% discount to the net asset value of its holdings. It’s part of Cris Sholto Heaton’s portfolio for MoneyWeek’s Asia Investor service (see www.asiainvestor.co.uk for more).