The good news from India just keeps on coming. The government now expects the economy to expand at a record pace of 9.2% in the year to the end of March, and the IMF expects it to overtake South Korea this year to become Asia’s third-biggest economy.
With annual salaries rising by 7% in real terms, rising purchasing power is underpinning consumption and manufacturing. Capital expenditure is on the up, with the investment to GDP ratio now over 30%, compared to an average of 25% between 1990 and 2004. “The takeoff phase of economic development” has long been associated with investment rates of more than 30%, says Stephen Roach of Morgan Stanley. “India is now on the move.” Small wonder that the Sensex index hit another record last week.
But beware: India is in danger of over¬heating, says The Economist. The market has risen fourfold in four years; it is “one of the emerging world’s most expensive” on a p/e of more than 20; prices are rising by 6%-7%; almost all firms are operating above their optimal capacity; and credit is expanding by 30% a year.
The fuss about an overheating economy and market is overdone, says Christopher Wood in the Greed & Fear newsletter. A key worry has been that India’s poor infrastructure will crimp growth, but this issue is finally being addressed by both the private sector and the government. Note that cement prices have soared, while $17bn of road projects are due to be awarded over the next year. “This is huge.” Meanwhile, there is no evidence that the credit cycle is about to blow up.
People underestimate India’s “structural pick up in growth”, says Wood. It’s reasonable to assume trend earnings growth rates of 20% plus, which means India “is not stupidly overvalued”. It remains “the best long-term growth story in global equities”, although the hot market could now do with a period of consolidation. David Fuller on Fullermoney.com agrees: he will only increase his stakes in India after a market correction, of which “there will be many”.