Buy India – But Beware The Coming Correction
FREE email from MoneyWeek
Discover the latest profit opportunities and understand what’s really going on in the investment world with our punchy daily email. CLICK HERE
This genius investor does dizzying levels of research to uncover...Half Price Shares!
With unsettling ease, India’s stockmarket is breaking records almost every day. The Mumbai (Bombay) stock exchange’s blue-chip Sensex 30 index is now past the 8,500 mark. If it makes it to 9,000, the index will have tripled in just three years.
The size and speed of the gains are the subject of much fanfare – and hand-wringing. India’s finance minister said earlier this year that he would worry about “irrational exuberance” if the Sensex touched 8,000.
So let’s “uncork the bubbly, carefully”, says India’s Financial Express. The Sensex took five years to hit 7,000, but just two-and-a-half months to reach 8,000. “Any celebration must be tempered with worry at the speed of the rise” and its “determination to ignore” potential problems.
It’s certainly true that Indian stocks are overlooking high oil prices, expectations of higher interest rates and political uncertainties. “The more paralysed the reformist government of prime minister Manmohan Singh becomes – its Communist coalition partners have been blocking reforms – the higher the Mumbai stockmarket soars,” says the FT.
Still, it’s hard to rain on India’s parade. The economy is growing at 7% a year. Earnings were expected to slow for the Sensex 30, but instead kept surging an average of 30% last quarter, says CLSA’s Christopher Wood. So while Indian stocks have risen 30% since May, they’re not grossly overvalued at nearly 20 times last year’s earnings and 15 times expected earnings – although they’re hardly cheap either, especially in “an emerging market context”.
Wood thinks a correction is overdue, but India remains his favourite Asian market over the long term. “This is an ongoing boom driven by a powerful domestic credit cycle likely to culminate in an urban property boom […] as occurred in Japan in the late 1980s and Asia in the early 1990s.”
India’s growth currently lags China’s. But India has a younger population, a better banking system, and a strong presence in major global service industries such as IT, all of which suggests its growth rate could well outstrip China’s in future. Goldman Sachs recently predicted that India, now the world’s 12th-biggest economy, will have the world’s largest population and third-largest economy, behind China and the US, by 2050.
Given that enticing long-term outlook, it’s no wonder foreign investors have been pouring in and driving up stocks. They have pumped nearly $20bn into the market over the last two years. That’s four times the amount of any previous two-year period. “The surge of foreign buying of the past two years reflects less obvious excess than the lack of foreign buying that preceded it,” says Wood.
But with the market racing ahead and looking vulnerable to a correction, careful stock-picking, rather than a general play, may be the best approach for those wanting to jump in now. Among Mumbai’s reasonably priced stocks with solid growth prospects are the State Bank of India (SBID, $49.50) the country’s largest bank, with a forward p/e of under seven, and Hindalco (HDCD, $3.58), its largest aluminium and copper producer, on a forward p/e of less than nine. Both stocks have London listings.
FREE! For all our latest advice on making profitable investments, claim your 3-week FREE trial of the MoneyWeek website and magazine now.
Money Morning is the FREE daily email from MoneyWeek
– a punchy round-up of the latest investment news and profit opportunities.
DON’T MISS IT!
