Why India’s too risky right now

U. W. M. B. C. A. Welegedara (yes, those initials are right!) is the new hero of Sri Lankan cricket. As a late replacement in just his second Test match, yesterday he cleaned bowled the great Indian batsman Sachin Tendulkar – for just four runs.

And that’s not good news for the Indian stock market.

Sachin Tendulkar is, arguably, the best batsman ever. He’s certainly scored more runs in international cricket than anyone else – nearly 30,000 of them. When he hammers a century on home soil, the whole country cheers right up. Including the Bombay Stock Exchange’s Sensitive Index (Sensex).

This Bloomberg chart below indicates that on 75% of trading days after a domestic Tendulkar ton – the blue bars show the daily percentage move – the Sensex rose. Indeed, the index ticked up following each of the last seven centuries by the ‘Little Master’. So any more swing bowling successes from Mr Welegedara won’t go down too well with the local stockbrokers.

But there’s a much bigger picture here. The Sensex has more than doubled from its early-March lows. And despite last year’s massive sell-off, the index has risen almost three times in five years to within 18% of the all-time high in January 2008.

Now the Sensex is looking ripe for a pullback. Firstly, the Indian Reserve Bank has started tightening monetary policy and “higher policy interest rates are only a matter of time”, says Kevin Grice at Capital Economics. Interest rate hikes are generally bad for share prices as they increase the returns investors can get elsewhere.

Second, as Grice also points out, “valuations are now expensive, and the risk that the near-term outlook surprises on the downside appears far greater than the possibility that India’s economy can continue to beat expectations”. In other words, the market is pricing in plenty of good news that may well not materialise.

My colleague Cris Heaton will soon be writing about India in MoneyWeek Asia, which is worth reading for more detail. But it looks too risky a market to buy into right now, however many runs the Little Master racks up.