But is this a fair picture of the current outlook for investors? Or does India still have some things to recommend it?
There is plenty of nervousness about the prospects for the India economy. Top of the list of investor worries is inflation, which is currently running at almost 9%. Guido Stiel, co-manager of the Allianz RCM BRIC Stars fund, says: “Inflation is more entrenched in India than in China, where it is related to food prices. In India it is a more structural problem. The central bank is also behind the curve in raising rates.”
He points out that India is also more dependent on the oil price because of its level of infrastructure development.
It may be behind the curve, but India’s central bank is taking steps to deal with the problem. It has raised rates ten times since the start of 2010, which has led to worries about growth. The IMF is now predicted growth of 8.2% for 2011 and 7.8% for 2012.
But the economy is not the stock market – the trouble is that the stock market does not look too bright either although there are some longer-term structural positive factors for the Indian market.
For example, Adrian Lim, senior investment manager on Aberdeen’s Asia Pacific Investment team, points out that China’s strong economic performance has not been reflected in its stock market.
From its inception in December 1992 until December 2010 the MSCI China index fell by 34% in dollar terms. The MSCI India index on the other hand has risen by 425%, approximately five times, over the same period. In other words, India’s stock market has kept pace with its economy while China’s has not.
Indian companies still have some advantages. Corporate governance is generally in better shape than in other Asian or emerging markets. It still has a ‘British’ governance culture with many managers educated in the UK, and managers tend to deliver a higher return on equity. This is part of the reason that Indian stocks have traditionally been more expensive.
Until India gets its inflation problem under control, its markets are likely to be choppy. There are a number of longer-term drivers for markets – attractive demographics, strong corporate governance, a growing consumer base – but this are likely to be sidelined until the immediate economic storm has passed.
For the full article, please see Portfolio Adviser’s August issue that is published on Monday.