The trouble with India

The Indian stock market is up 45% so far this year. One of the main reasons is the fact that turmoil in the West has made India look like something of a safe haven. But is it as immune to the effects of a US recession as investors hope?

I'VE been going on about the risks of investing in property for far too long now, but I'm no longer such a lone voice. The Money section is filled with bad news this week. Even the most optimistic estate agents can't bring themselves to predict much more than a period of stability, and while the numbers aren't looking too nasty, it is clear that UK asking prices are being slashed across the board (see to see where and by how much).

The balance of power has changed so much - from seller to buyer - that last week I even found details on Primelocation of a 1,900sq ft house I can almost afford to buy. That hasn't happened in a long time. More worryingly, the International Monetary Fund is saying that there is every chance Britain will see a property crash not that different to the one under way in the US. This is depressing stuff.

The price falls in America are already hitting economic growth and, given the dependence on housing in Britain as well, it is hard to see how the same won't happen here.

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For me this - along with the credit crunch, which has made it more expensive for even the very creditworthy to borrow money - makes it hard to justify buying any shares with a domestic bias in the UK: why buy a bank if it is going to be exposed to rising loan defaults, and why buy a retailer if tight credit conditions mean its customers can't spend with the abandon they once did?

Clearly I'm not the only one thinking like this. For proof look no farther than the raging stock markets of India and China: India is up 45% so far this year and China more than 100%. You can chalk up this astounding performance to all sorts of things - the fact that the two countries will between them be responsible for nearly half of global growth this year perhaps - but it is mainly a function of the difficulties of the West.

Turmoil here has had the weird effect of making much of Asia look like something of a safe haven. Today's Asia, or so the story goes, is a completely different place to the Asia of 1998. Its economies are in such good shape that regardless of the rising odds of recession in the US they can keep growing independently - they have in effect "decoupled" from America.

I'm not entirely convinced. In 20 years, maybe 10 years even, it could well be that investors in China will barely glance at the state of America before making investment decisions. But right now much of Asia remains very heavily dependent for its growth on the US consumer: the US still accounts for one-fifth of Chinese exports, for example.

And even if it is true that Asia can decouple or has decoupled from the West, it doesn't necessarily follow that the Indian and Chinese stock markets are automatically a good investment.

To see if they are or not we have to look at the price we have to pay for their growth, and right now that's a pretty high one. The UK's FTSE 100, up a comparatively pathetic 7% this year, trades on a price/earnings ratio of 13.5 times. But India's Sensex 30 trades on a p/e of about 25 times, while the Shanghai Composite (China's benchmark index) is on a faintly absurd 54 times.

This seems high given the risks that emerging markets still come with. Look at what happened in India last week. The regulatory authorities announced late on Tuesday that the huge amount of money pouring into the market - $4.6 billion (£2.2 billion) this month alone - had spooked them a bit and they were going to put controls on the hedge funds' favourite method of investing (via anonymous offshore derivatives called participatory notes).

The market promptly fell nearly 10% (hedge funds hate any suggestion that capital flows can be limited by state authorities). It closed down only 2% at the end of the day but it was nonetheless a scary moment for those who put their faith in India as a safe haven. Clearly the money that has been pushing up prices is not the kind of money prepared to hang about in times of trouble.

So what should you do about India? Join in and hope the boom keeps going or keep your money in the real safe haven of a bank account? Looking to the long term this is a simple one to answer. The domestic economy is strong, and India is already home to a good array of globally competitive companies as well as an enthusiastic workforce and a growing middle class keen on spending their new disposable income on buying the same life-styles those of us in the West have long taken for granted.

So of course you want to have money in it for the long term. Shorter term, though, I'd say putting money in is more speculating than investing. It's very expensive and, however convincing the bulls may sound, the decoupling argument is far from won.

India is also far from perfect as a developing economy: it is hugely corrupt, poverty remains widespread and its infrastructure is appalling. Indian stocks may keep rising there is a lot of money out there looking for a home - but I suspect we'll be seeing more of a bubble than a boom. If you are brave enough to take that on, the best way to do so is probably via an exchange traded fund that tracks the market such as the London-listed S&P CNX Nifty.

First published in The Sunday Times 21/10/07

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.