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August 28, 2013

Idea of the Week: Taking another look at India’s equity markets

by Steven Carroll.

Recent headlines about India have been dire indeed, with currency markets and equity markets selling off. So how bad are things?

Have markets simply given up on a lack of meaningful reform by Prime Minister Manmohan Singh? Are there simply better opportunities elsewhere? Are we witnessing the final demolition of “de-coupling” – the bull market Nirvana where emerging markets were no longer tied to the fortunes of the larger, lumbering western economies.

First, what are the realities? How far has the Indian market fallen? Is the Indian market now cheap?

As seen in the chart below, the five-year performance of the S&P BSE Sensex (green) is positive, though eclipsed by its Asian BRIC partner, China (red). This year’s decline barely even registers on the chart and hardly appears cataclysmic or even confidence-shaking. The divergence in performance this quarter is interesting, no doubt due to some institutional rebalancing away from India.

BSE SSE 5 year performance Eikon
Source: Thomson Reuters Eikon

By comparison, the Indian currency is showing signs of panic – which of course makes the Indian market more attractive to the outside world. Here’s a five year view of the Indian rupee, inverted, against the USD.

IOTW_2
Source: Thomson Reuters Eikon

Making exports more competitive?

Now the headlines in the currency markets start to make a little more sense. The INR is trading at its lowest level ever against the dollar. One hopes any BRIC fund is currency hedged.

Every economic textbook will tell you that the export sector will help reinvigorate the economy as the falling currency will make it more competitive – and Indian exports account for 24% of GDP according to the World Bank, compared with 14% for the U.S. and 31% for China. Governments on the northern Mediterranean shore will no doubt watch this healing process with envy, as their currency albatross prevents such an effect. Is it time to add some exposure to India?

IOTW_3
Source: StarMine Professional

IOTW_4
Source: Thomson Reuters Eikon

The case for investment?

Let’s look at the current multiples to see whether there’s a decent investment case. From a P/E perspective, (above chart) India is trading at a reasonable 11.4 times forward earnings (F12M). However in the context of the recent market sell off, that doesn’t seem too appealing. The Asia-Pac aggregate is 10.8 – so India remains above average – and you can buy China, Hong Kong or Korea all on multiples under 9.1. Equally, India is not expensive, but not yet cheap from a Fair Value perspective.

So while the BRIC markets seem to be falling out of favor ,there certainly doesn’t seem to be a compelling story at the aggregate level for India, or indeed for much of Asia. The Chinese market seems to be the furthest along in it’s market correction from inflated levels – as noted in the Alpha Now story, here. For the time being – it looks best to stay on the sidelines.


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