What makes Ajit Dayal a buyer of Indian stocks are a few fairly simple assumptions and facts:
The Indian stock market has done well over the past six years. After some semblance of control over the outbreak of SARS, global investors began looking to invest in more “risky” places. In the past 6 years, the BSE-30 Index has given a +228% return in US Dollars – with dividends reinvested back in the market (see Graph 1). In comparison, China has given a return of +109% and the MSCI Emerging Markets Index has given a return of +137%. The Indian economy is more balanced than some of the larger emerging market economies. China is very reliant on exports; Russia is dependent on oil exports; and Brazil is dependent on a few commodities and China’s ability to export these processed commodities to the developed world.
India does better than China and emerging markets index
Source: Bloomberg
The Indian economy has been affected by the global slowdown. Some Indian companies had planned their businesses around a booming global environment. That has disappeared. And these companies will have a few tough years as they navigate themselves out of the excess capacity and international adventurism. But there are other companies that are still focusing on the Indian consumer. And their growing needs. The level of the BSE-30 Index in relation to the historical earnings of the BSE 30 Index is now 14x, and the all-time low was 10x in 1998. This compares with the Price-to-Earnings Ratio of 21x. This is the average over a 20 year time period (see Graph 2). Profit margins of companies have been under pressure for the past few months but – given the inherent growth in the Indian economy – revenues will resume their growth again as will profits. Stock markets move on anticipated profits, and this should cause the markets to rise.
Indian stocks are cheap
Source: Bloomberg
But will the market rise immediately? Will it continue its recent rally? In the near term, a lot of this depends on what the foreign investors do. And it also depends on the election results which will not be known till June 3rd. the markets have regained the 10,000 level – its fourth attempt to stay above this level since last November, 2008
Are the charts pointing up?
Source: Bloomberg
A lot of short term concerns are in conflict with long term trends. In the short term, the gloom and doom will win but in the long run, the markets will give patient investors sensible returns.
