As an underinvested and overambitious nation, India continues to emerge as one of the most promising investment destinations in the world.
For investors who missed the boat on China, India could provide a second chance for high-growth, said Serge Pepin, head of investments, BMO Investments Inc.
“We believe India has a bright future with its investments and stocks and is likely to witness perhaps even better inflows than China,” he said. “The main and major difference is that [Canadian] investors can participate in that growth.”
From an investment perspective Indian financial markets represent a good opportunity for Canadian investors despite the challenges that come with any developing market.
Demographics and domestic consumption form the bedrock of Indian economy, but it’s the numbers in the narrative that tell the real story.
“The Indian market, measured by MSCI India in U.S. dollar terms, declined by 8.5% in the first half of 2011 after a gain of almost 21% in 2010 which was following a gain of almost 100% the year before,” he said. “The markets bounced back by end of June 2011 and valuations became attractive again, trading at 15.5 times [earnings] with 2012 estimated earnings near its long-term average.”
The Bombay Stock Exchange (BSE) has been under pressure and underperforming other emerging markets due to concerns over inflation, rising energy prices and political controversies. Many of these factors are being actively tackled by the central government.
Inflation in India has continued to surprise on the upside and has forced the Reserve Bank of India (RBI) to take drastic steps. Over the past 15 months, it has raised rates 11 times, taking its benchmark rate to 7.5%. Pepin believes the RBI will continue its fight against anti-inflation.
Investor enthusiasm, somewhat curbed by the RBI’s tightening measures, is expected to return soon. “We believe the interest rate tightening cycle may have peaked which could be favorable for the Indian banking and financial services sector,” said Pepin.
Additionally, rising crude oil prices have had a sobering effect on sentiment in India, a country that imports 65% of its energy requirement. “This seems certain to impact inflation and its current account deficit,” said Pepin.
As pro-growth policies in the developed world drive oil and commodities prices higher, it is anticipated that India, which relies on imports for much of its energy needs, will continue to be volatile in the second half of the year. Recent softness in the energy sector has been a good for India, however, and further corrections could be beneficial.
The Indian rupee remained relatively stable at the end of the first half of the year, despite rising crude oil prices and volatility of flows from foreign institutional investors. “Inflows from foreign institutional investors grew sharply to $26 billion at the end of 2010 from less that $4 billion in 2001,” said Pepin.
Gross domestic product (GDP) growth, at the end of the first quarter, stood at 8.3% compared to fourth quarter 2010 expansion of 8.2% and expectations for fiscal 2011 are pegged at around 8.6%, he said.
Growth in the index for industrial production, relatively low in the first quarter, has rebounded to 5.6% as of May 2011, but does remain below the 7.5% average of 1994-2010.
Judging by the pace of earnings momentum, Pepin expects corporate India’s earnings growth to be in the rage of 18% to 20% year-over-year in the next two years. “Earnings have become more diversified and less dependent on one or two sectors,” he said. “In line with our view of acceleration in infrastructure spending, the government has commenced the tendering of road projects which could be awarded in the third or fourth quarter of 2011.”
Some of the other interesting sectors are domestic consumption related stocks which are poised for strong growth.
“The possibility of the rupee weakness may also benefit export related names and the infotech and pharmaceutical sectors,” said Pepin. “An improving global growth environment could be a trigger for higher than anticipated growth in sectors such as industrial, materials and property. In the short to medium term the Indian stock market will be guided by the RBI’s monetary policy stance, inflation trajectory, global commodity prices, global economic factors and investment cycle pick-up.”
By 2013, Canada and India plan to have a free trade agreement in place, opening the door to increased trade and business that will boost Canada’s gross domestic product by at least $6 billion a year.