26th March 2014
Edmund Shing considers whether investors should look at India again.
Astute observers will have noticed that the Indian Sensex index has just hit a multi-year high at over 22,000 (Figure 1).
Not only that, but the Indian rupee has also started to gain ground against major currencies such as the US dollar, the euro, and sterling (Figure 2).
Given the relatively poor backdrop for most emerging markets thanks largely to Russia and China, why is India bucking the trend so successfully?
A widely respected central bank governor, Raghuram Rajan, has already been installed at the Reserve Bank of India. He has lent a lot of credibility to the central bank policy of attempting to control Indian inflation which is still relatively high at 8.1%, but which is finally starting to come down.
A second driver for a positive view on India comes from Indian politics. Parliamentary elections are due to be held soon in India, and current opinion polls indicate that Narendra Modi’s Bharatiya Janata (BJP) opposition party is likely to win power, ousting the long-serving Congress party in the process. This is being seen as a good opportunity to see widespread reform within India, which may remove some of the structural roadblocks to Indian growth.
Clearly, while it is not clear that tensions over the Russian annexation of Crimea are calming or that sanctions will not be intensified on the part of the US and European Union, and while it is not clear as well that China will reignite growth in the near future, nevertheless India remains a bright spot within the emerging market universe.
According to Bloomberg, overseas investors have given their vote of confidence to India; they have already added $1.1 billion to Indian stocks this year, the most among Asian markets tracked by Bloomberg after Indonesia and Taiwan, and also pumped $6.2 billion into government bonds.
Valuations in India are still relatively reasonable: the P/E ratio stands at 16.5 times this year falling to only 14 times for next year: well below the long-term average valuation ratio of 18 times for India.
In terms of growth, remember that the composition of the Sensex is quite growth – oriented. Unlike other EM stock markets, the Indian stock market is dominated not only by banks but also by growth oriented technology companies such as Wipro and Tata Consulting Services. There are also a number of innovative pharmaceutical companies listed in India such as Dr Reddy’s, with promising pipelines of new drugs under development and likely to come to market soon.
On the London stock exchange, there are a number of ways that you can invest in India. Firstly you can buy one of a number of ETFs (exchange – traded funds) from providers such as:
Secondly, you can invest in investment trusts such as the:
JII trades at a 13% discount to net asset value, while NII (managed by Aberdeen Asset Management) trades currently at a 14% discount to NAV.
Thirdly, for more aggressive investors, there are also a number of Indian-based companies listed directly on the London Stock Exchange. One such company is Greenko Group (code: GKO) which invests in renewable energy such as biomass plants in India. More information on this company can be found here: Greenko Group company profile.
So, for those investors understandably nervous about investing in emerging markets such as Russia or China after their stock price falls, I would urge you to instead consider investing in Indian stocks.
This highlights one of the themes that I expect to be prevalent through throughout 2014, namely that emerging markets are no longer going to be as highly-correlated as in recent years; thus investors need to be selective about which countries or regions they invest in, rather than just investing in emerging markets en masse.