Some of the most convincing arguments in favour include government reforms, good demographics, quality companies and a positive earnings cycle, according to fund rating service FundCalibre. These combine to make it an attractive place to invest at the moment,
However, there are still three reasons to be cautious, FundCalibre said.
Valuations is the first of these. The Indian market never really looks cheap and even after the market correction in April this year, valuations are still on the expensive side. However, if this is the start of a multi-year earnings growth cycle, the Indian market could still provide healthy earnings-based returns from here on out. One thing to consider is that ETF flows have made larger companies in particular more expensive, but there is still some value to be found in medium and smaller-sized companies.
Infrastructure is the next concern for FundCalibre. India is ranked 81st out of 100 countries for quality of infrastructure and its poor state has held the economy back for many years. Rapid urbanisation means that massive investment is also required for everything from underground systems to clean water supplies, power generation and affordable housing, as well as more airports and ports. It is among Modi’s planned reforms, but a lot of time and money is required, and there is a question mark over whether Modi will be able to push through the much-needed reforms in this area.
Slowing growth is the last of the trinity. In September, in a much anticipated move, the Reserve Bank of India cut the benchmark interest rate again by 0.5% to 6.75%. The move was designed to provide a bigger cushion for the economy against the global turmoil and rapidly receding inflation. Other measures have also been taken to try to keep the economy on a sound footing, including the issue of Masala Bonds, aimed primarily at foreign investors to provide a useful additional source of funding for Indian companies.
Despite these issues, India remains FundCalibre’s favourite emerging market, as the fund rating service believes that it will do well in the long term, taking over from China as the driver of Asian growth.
