I have been meaning to write this post for awhile, but my recent visit to the BSE (Bombay Stock Exchange) stirred me to action. Anything dealing with Asian emerging markets is extremely appealing to me, so you can imagine how intriguing traveling here is for me. In addition to books and regular newspapers, I have been keeping up on the Indian and global equity markets. On a personal level, this yearning to keep tabs on the markets has confirmed my intuition that perhaps I should pursue a career in the field. Below is my brief amateur analysis of the Indian market.
One of the first things one notices upon visiting India is its growth. Sure you can read about the near double-digit GDP growth in the paper, but its something else to see the rapidly expanding middle-class buying all the trappings of their newfound wealth (washing machines, refrigerators, expensive cell phones, etc). You see countless infrastructure projects underway from rural highways being built to metros and “flyovers” (overpasses) in the cities. With so much investment going to into infrastructure from domestic IPOs to FDI (foreign direct investment) and a labor oversupply, the only thing that delays these projects is a supply shortage of building materials (steel, cement, etc). Anything that caters to India’s growing middle class or infrastructure is growing big time. Financials are booming as banking services have a huge population to reach and credit is just beginning to be accepted. Telecom is expanding rapidly as internet and phone services on wireless networks become more economical than landlines and computers.
The excitement is everywhere. Every newspaper and tons of billboards display the latest mutual fund offerings IPOs. When we walked down Dalal St (India’s Wall Street), tables had all the offering documents for new MF’s and IPOs. Snack vendors sold samosas and pakoras on little squares of prospectuses, red herrings, and offering documents. Everyone’s eyes are glued to the Jumbotron on the BSE building, showing stock news and the marquee scrolling tickers below it. The news is constantly filled with announcements of new private equity and hedge funds. The stock market is everywhere- you’ll everyone from small business owners to engineers talking about their investments. As the developed world faces the sub-prime crisis, Indian magazines pridefully list the biggest deals of the week and tabulate India’s global M&A (mergers and acquisitions) rank in dollars. This is being driven by both Indian small caps being bought up and Indian industrials buying abroad. Luckily India is a free market with open capital markets, allowing individuals to participate in “the Indian growth story.”
The Stock Market
India has over a billion people and the country’s economy is growing like crazy. Despite this, the Indian stock market is small, relative to both developed markets in the west and even China (to whom they’re so often compared). Most of the companies have relatively small market caps, but unlike most emerging markets there are a ton of listed companies and India is more integrated into the global financial world than even countries like China. For these reasons, the Indian market is both volatile and relatively more correlated to developed markets. However, like most developing nations, a miniscule percentage of the population invests in the equity markets (in fact, up to two-thirds of the population in some states don’t even bank). On the flip side a miniscule percentage of one billion is still in the tens of millions. But the fact remains that India’s growth is largely driven by the small (but growing) middle class and financed by the upper class and financial institutions. (sidenote: I’m currently working on a blog post outlining Indian economic demographics and the 900 million people living on cents a day that aren’t participating in India’s boom).
A couple unique features of the Indian markets. Like many developing nations, commodities are important both because India mines and exports minerals, and because (despite being the second largest producer of most grains in the world) it must import a ton of crops (exporting most grains is banned as well) to feed itself. The business pages don’t just list the spot prices, but multiple closing and futures prices in both India and world commodity markets, for everything from copper to cashews. Lastly, despite being an emerging market, financial institutions here utilize some products of the developed markets. F&O (futures and options) as they call it here, is huge. While I can definitely see the utility in financial institutions using derivatives to hedge in a volatile emerging market, it’s surprising that options are so easily accessible to retail investors (even more so than in the US). Perhaps they are hoping to make easy money in an economy growing incredibly fast, 8-10% GDP growth per year. However, short-selling is not yet allowed, although there is talk it will be introduced soon and the bond market is still not nearly as liquid as developed markets. Nearly every bank offers brokerage services/accounts and products such as mutual funds.
In a nutshell: booming, volatile, upper-crust driven, focus on raw materials and infrastructure, increasingly complex (development of derivatives, shorting, and liquid bond market).
The Bad News
So with so much growth, why not throw all your money into Indian stocks? Well for one, you cannot (unless you’re an NRI). There’s 12 Indian ADR’s listed on American exchanges and only a handful of MF and ETFs. Furthermore, most of the ADRs are IT/BPO, with two banks, one auto company, and a pharmaceutical. Worse still, they often trade at premiums to their real prices in India. Two, the weakening dollar is killing IT companies and exporters. So you may see some weakness in those historically very strong and important sectors. Three, valuations- opportunities to buy good companies in this growth environment are far and few between. Four political risk. India has enjoyed the same stable government for the past three-plus years. People blame the Left for keeping India’s GDP growth in the single digits, but if they follow through on their threat to pull out of the coalition government, the Left would do a lot worse and the markets would take a big hit. In addition to all this, the Indian stock market is extremely volatile, in part because it doesn’t have a liquid bond market to absorb economic shocks. Thus, even if you are a multimillionaire or have some Indian blood (NRI), investing in India now may be risky. India’s economy and infrastructure (in particular) will continue to grow feverishly. However, looking ahead, the rising rupee, rising valuations, and political turmoil are brewing quite a storm for the equity markets. The Indian market is still a long-term buy and should have huge growth, but its going to be a bumpy ride.