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A time for great optimism
By India Stock Research | October 15, 2008
Just like the hero in a Bollywood masala movie, investors in Indian stocks have been crushed, stomped on, then beaten into pulp and then in final ignominy, is arrested by inept policemen who then imprison him until he is rescued by his long lost brother and now grown up son.
The rescue is at hand. The first cause for optimism is the collapse in energy prices and commodity prices in general. The price of oil has halved. Agricultural commodity prices have moderated and inflation is no longer a concern. The Reserve Bank of India (RBI) after appearing to being tone deaf to the implications of the US financial crisis, is now responding aggressively by cutting rates, adding liquidity to the system and removed its hawkish anti-inflationary stance. The Indian government we believe will add some fiscal stimulus to stabilize sentiment and confidence in the financial system, joining worldwide campaign by national governments from the US to China.
Indian stocks are cheap. By many estimates, Indian markets trade between 10 - 11 P/E which is very attractive when one considers that India’s long-term economic growth is likely to average 8% - 9%. India has many attractive characteristics that put its economy and markets in a favorable light even when being compared to China. Critically with respect to the current crisis, India’s trade with the US is small, perhaps as low as 3%. The impact of a collapse in consumer spending in the US will be visible but not substantial. The most affected parties are companies like Infosys, Tata Consulting and the business process outsourcing providers. However, even these companies could benefit, if the US accelerates cost cuts, and pushes more non-essential business activities offshore.
For the vast majority of the companies that trade on Indian exchanges, the most critical factors are banking system liquidity, consumer confidence, investor confidence and internally driven economic growth. India, unlike most emerging markets holds its own fate in its own hands. If the RBI and the Indian government’s actions are successful in ending the cycle of panic causing depositors in Indian banks from pulling funds out of the banking system in fear, Indian markets should begin to stabilize soon. If banks begin to lend, not just between themselves but to consumers and businesses, in response to the RBIs highly stimulative monetary policy, India could be on the road to recovery by mid-2009. With a recovery will come investor confidence which in turn will drive consumer confidence.
Markets are discounting mechanisms. Stock markets will sniff a recovery well before the numbers show up in macro-measurements like GDP or production growth. One of the ways to determine what stocks to buy is to look at 5-year historical returns on equity in the types of sectors and industries that we highlighted in our About us section and look to purchase these in equal installments over the next 3 or 6 months, relative to the amount the reader has to invest.
Many commentators and market pundits believe that the Indian market is dead and that it is doomed to repeat the failures of previous booms. We disagree. India today is in much better shape than in any previous economic crisis. India has substantial reserves and while its current account deficit is not small, it’s not large enough to cause a crisis. The Indian economy after nearly two decades of reform runs on lots of small engines of growth that represent the fastest growing areas of the economy. Government spending is an important feature of the Indian economy and will play an important role in maintaining the trajectory of expenditures in critical areas like infrastructure. In our opinion, the Indian growth story beat goes on. The recent decline in stock prices must be seen within the context of a long-term rise and as an opportunity to participate in the emergence of a future economic powerhouse.
Topics: Market commentary |