Riddled by a stream of bad news, Indian equity markets have lost much ground. Current pricing and a growth imperative driven by demography now suggest a favorable mid- to long-term outlook for equity markets.
A year of bad news
A large amount of bad news has come out of India over the last year or so. The uncovering of large-scale corruption at government level prompted popular protests, where Anna Hazare came to symbolize the cause against graft.
The corruption scandals helped turn investor sentiment against India, and the effect was further compounded by retro-active tax charges levied on Vodafone, and a successful lobby by Indian traders that block Walmart’s expansion in the country.
All this translated into disappointing stock market returns, well aided by souring market sentiment in the US and in Europe.
No choice but growth
More than half of India’s population is under 25 years old; it has more young people than any other country. Over the next years, they will enter the workforce in large numbers. This by itself will cause growth to happen, unless bad policies block the creation of jobs.
Parameswara Krishnan, DNB’s lead portfolio manager on Indian equities says: “There exists a growth imperative. The government knows that it must facilitate job creation to preserve political stability. Given the expansion of the labor force, this is not a matter of ingenious policies, but one of removing bureaucratic roadblocks. In the past, India’s leadership has proved capable of doing this, and it will do so again now."
A good entry point for investors?
The pricing of Indian equities reflects negative sentiment and is by any measure cheap. At the same time, statistics show that foreign investors have accounted for net inflows into Indian equities over the first half of 2012. And recently, good news has emerged; most notably that IKEA plans to rapidly build a network of stores in India.
While market timing is notoriously hard to get right, indications suggest that downside risk is limited. “We may not be in for rapid growth in the short term, but it is hard to see the stock market lose much more ground. With a medium to long term horizon, current price levels represent an attractive point to start buying Indian equities”, says Krishnan.
Investment regions compared: India ahead of the world (MSCI Indices, US$)
Source: FactSet, MSCI, IBES Estimates, Morgan Stanley Research
Valuation support: Attractive price levels represent upside potential (P/E ratio)
Source: World Port (internal)
Our fund offering: DNB India (ISIN: LU0302237721)
DNB India is a flexi cap fund that invests in Indian equities. It is compliant with the UCITS IV framework.
Performance DNB India
Source: TWR (internal)
Parameswara Krishnan: brief biography
Mr. Krishnan joined the group in 1998 as an equity analyst. From 1994, he was a director for Anush Shares & Securities in Chennai and before that, from 1993 to 1994, he worked for ITI Pioneer AMC and was involved in setting up Kothari Pioneer Mutual Fund. From 1990 to 1992, he was portfolio manager of the SBI Mutual Fund in Bombay.
Mr. Krishnan speaks Tamil, English and Hindi and earned his engineering degree in Computer Science from M.S. University of Baroda and an MBA from the Indian Institute of Management, Bangalore.
