This is hardly surprising given that India was one of the worst performing markets globally in 2011, with the country now facing a rapidly cooling economy as well as stubbornly high inflation, political paralysis and a ballooning fiscal deficit.
Market pricing in negatives
However, we feel the above has already been baked in by the markets. The Sensex is now trading at a near 20% discount to its ten-year average and 10% from March 2009 lows, thus providing valuation support.
So unless there is Armageddon in Europe – which would naturally impact all markets – history shows that current India market valuations have consistently been a good entry point over a five-year horizon.
More importantly, while GDP forecasts have been brought down, India should still achieve growth of between 6.5-7% this year and 7%+ in 2012/13. So, we feel the current situation is a minor hiccup in an otherwise long-term growth story. Indeed, the demographic dividend for India is only just unfolding, given that over 50% of the one billion-strong population is below 25 years of age, the highest proportion of any country in the world.
This, together with rising incomes and easier access to credit is expected to lead domestic demand spending to double by 2015 to around $650bn.
Moreover, despite the recent growth in domestic consumption, India still has the lowest penetration of mortgages (5% of GDP), cars and mobile subscribers in the world. But it’s not just the aspirations of urban India; rural spending is also taking off.
Over the past ten years, the number of households moving into the middle to high income bracket has risen from 50 to 90 million households; this should be further enhanced by ‘normal’ monsoons benefiting rural India’s approximately 70% farming population through increased crop output, ultimately contributing to raised spending across a wide range of industries.
Infrastructure investment
One area that remains a laggard is India’s infrastructure deficit and this by far could be the biggest driver of GDP growth over the next decade. The government in its 12th five-year plan is forecasting infrastructure investment of $1trn across power, roads, airports, ports and railways. It is fair to say that these estimates have proven optimistic in the past, but if existing projects are given the necessary clearance and budget support, then confidence would likely return to the sector.
Perhaps as interest rates fall (we expect rate cuts to start from February 2012) this will provide the stimulus for new orders to be awarded, as well as provide India’s corporate sector with the confidence to kick-start their own capex plans.
With sentiment throughout corporate India also running low, we feel the government really doesn’t have to do too much to repair confidence; once the local elections are over in March, the hope is that the UPA Congress-led government will be back onto its front foot, unleashing reforms across many sectors.
On balance, we feel all the risks are being showcased and this is hurting near-term sentiment, while the long-term growth story of India is being ignored. Current valuations, in our view, provide an excellent entry point.
And remember, while it took India 60 years from independence to achieve a GDP of $1trn, we expect it will take only seven years to reach the next trillion.
