Buoyed by a decisive election victory for the pro-business government of Prime Minister Singh, India's Sensex soared 17% at the start of last week, the biggest one-day gain in almost 20 years.
But are Indian stocks now too expensive? And can the election really pave the way for India to continue the rapid development that saw its economy grow by an average 7.8% a year between 2000 and 2007?
The answer to the first question is no not in the long run. Even after last week's gains, the stockmarket was trading 25% below the ten-year average price-to-book ratio, says CLSA's head of India Research N. Krishnan. It also trades on a forward p/e of 16.5, a discount to markets in China, which trade at closer to 20. However, having risen 44% already this year, there will probably be more attractive periods to invest in the market once the current global bear-market rally stalls. Indeed, some foreign funds have already begun taking profits, Paras Bothra of Ashika Stock Broking tells Reuters.
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As for the second question, there are reasons to be cautious. The win for Singh and his Congress-led United Progressive Alliance (UPA) is certainly good news, as it means the once-powerful Communist party has been kicked into touch. The election will "have a big impact on business sentiment", says Jupiter Asset Management in The Daily Telegraph. But India can't escape the fact that we are in the biggest global recession since the World War II.
Moreover, the new administration inherits a "dire" fiscal situation, says Capital Economics. With a budget deficit of more than of 10% of GDP, ratings agencies are threatening to downgrade India's debt to 'junk' status. That means big budget cuts are inevitable. That's bad news for consumer demand, as the government has spent lavishly on national jobs schemes and hikes in civil service wages over the last five years.
Still, India offers good long-term opportunities. If you don't already have exposure to the market, it's worth watching for a chance to get in. Foreign direct investment in 2008 accounted for around $24bn, or 2.2% of GDP, say analysts at UBS. That's a big jump from 0.6% in 2004, but small by Asian standards. With the scope for this to treble in the next three years as the government lifts restrictions, India is a market to buy on the dips. Unit trusts such as Neptune India and Jupiter India look solid, up 53% and 50.3% over the last six months respectively. But with its lower expenses, we prefer an investment trust such as JP Morgan Indian (LSE: JII). It is up around 183% over five years and trades on a discount of 5%.
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