The markets may have turned jittery, but the good news is that more and more investors are turning overweight on India. That’s not because of any great improvement in either the Indian economy or in corporate earnings. In fact, earnings estimates for FY10 have been pared drastically in recent months and there could be some more pain to come.
The only reason for investors’ new-found love for the Indian market can be summed up in one word: valuations. Macquarie Securities’ Asia strategy quarterly report sums it up best. It says: “Working against the most challenging fundamental backdrop for Asian equities for over a decade is valuations. Asia ex-Japan is undeniably cheap at current levels.”
Which country is Macquarie’s top pick? India. It lists several factors: comparatively high growth (India has the second highest growth rate in the world); policy easing by the Reserve Bank of India; the fact that the government had provided a fiscal stimulus much before the crisis started to bite—the Sixth Pay Commission and debt relief for farmers—for reasons that had nothing to do with helping to mitigate the crisis; lowering of earnings expectations in recent months and, most importantly, the fact that the Indian market is now trading at a discount to the MSCI Asia ex-Japan index.
Says the report, “The latest forward PER of 9.9x is more than a standard deviation below its long-run average, but most interesting is that India is now trading at a discount to Asia ex-Japan, something it hasn’t done on a sustained basis since 2001.” PER is short for price-to-earnings ratio.
Recall that the Merrill Lynch and Co. Inc. survey of fund managers last month found that investors had removed their underweight position on India for the first time in two years. They are now building on that.
HSBC, which has an overweight on India, believes that “India’s economy will start to recover in the second half of the year and that consensus is too pessimistic about FY10 earnings.”
The other reason for a fresh look at India is simply because China has become a very crowded trade. Ever since the Chinese government announced its stimulus package, funds have flowed into China, sending the markets there up substantially. It’s time to consider other markets, and India seems to be fitting the bill.
Of course, there continue to be plenty of uncertainties, including the elections. And while Macquarie may be overweight on India now, a research note by Daniel McCormack, head of Asia equity strategy, puts India back into neutral in the second quarter of the year.
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