India’s irrational exuberance

The return of bullish sentiment in Indian stocks could be premature.

After a shaky summer, the bulls have returned to India. The benchmark Sensex Index gained nearly a fifth between late August and early November. Yet as India's finance minister warns, this looks like "irrational exuberance".

The rebound was based on the US Federal Reserve delaying the start of its taper, whereby it would reduce the pace of its money-printing programme.

Tighter US monetary policy is always a headwind for emerging markets as investors begin to factor in higher interest rates in America and other developed economies, making risky emerging markets less appealing. Money then tends to leave emerging markets.

India, more than most, is "at the mercy of the global liquidity cycle", says Caroline Keen of the Newton Asian Income Fund. It runs a big current-account deficit, meaning it relies on foreign capital to plug the gap. Worse still, this capital is made up of flighty, short-term portfolio inflows rather than more secure and long-term foreign direct investment.

So Indian assets bore the brunt of the emerging markets sell-off when the Fed mentioned tapering in the early summer, and bounced when the US central bank looked set to delay it in early September.

Efforts to temper the current-account deficit by clamping down on gold imports also helped. But due to last week's strong US data, "concern over tapering and its impact on countries with current-account deficits is gradually creeping back into the market", says Tai Hui of JP Morgan Asset Management.

The macroeconomic backdrop isn't encouraging either. India has had an abrupt slowdown. In 2010, GDP expanded by almost 10%, but for the year to next March, growth of 3.7% is being pencilled in. Don't expect a fast turnaround.

The government has been spending too much and there has been only slow progress on deregulation to encourage investment. There is an election due next spring, so further reforms are likely to be off the menu for now.Inflation has crept above 10%, implying further interest-rate hikes to squeeze it out.

Investors have also started to notice that the Sensex is relatively dear on 14 times forward earnings, compared to 10.4 times for emerging markets as a whole. For Indian equities, says Cornell University's Eswar Prasad, this summer's rebound may soon come to be seen as the eye of a storm.

Recommended

Interest-rate rises mean more pain for stocks
Stockmarkets

Interest-rate rises mean more pain for stocks

Interest rates are rising around the world as central banks try to get inflation under control. That’s hitting stockmarkets – and there is more pain t…
13 May 2022
Anna Macdonald and Mikhail Zverev: Investing in innovative new frontiers
Investment strategy

Anna Macdonald and Mikhail Zverev: Investing in innovative new frontiers

Merryn talks to Anna Macdonald and Mikhail Zverev of Amati about investing in growth-focused innovation in the teeth of a tech-stock selloff, and the …
12 May 2022
The return of the Marcos dynasty to the Philippines
Emerging markets

The return of the Marcos dynasty to the Philippines

The Philippines has elected Bongbong Marcos as president, three decades after his family was ousted from power in a popular revolution. What does that…
12 May 2022
The tech-stock bubble has burst – but I still want a Peloton
Stockmarkets

The tech-stock bubble has burst – but I still want a Peloton

Peloton was one of the big winners from the Covid tech boom. But it's fallen over 90% as the tech stock bubble bursts and and everything else falls in…
11 May 2022

Most Popular

High inflation will fade – here’s why
Inflation

High inflation will fade – here’s why

Many people expect high inflation to persist for a long time. But that might not be true, says Max King. Inflation may fall faster than expected – and…
13 May 2022
Cryptocurrencies are crashing – so how low will bitcoin go?
Bitcoin & crypto

Cryptocurrencies are crashing – so how low will bitcoin go?

The entire cryptocurrency sector is crashing, with bitcoin now well below $30,000. This is big, says Dominic Frisby. So just how low could bitcoin go?
12 May 2022
What the Ukraine crisis might mean for ESG investing
Advertisement Feature

What the Ukraine crisis might mean for ESG investing

The Ukraine crisis has brought many of the issues around ESG investing into sharper focus. Where does the sector go from here?
3 May 2022