India
Should You Invest in India?
The main stock index in India, the Sensex is up 80% in local currency YTD. After falling to about 8000 in March this year it has more than doubled and closed at 17,360 on Dec 24th. YTD the index has risen by 81%. Many investors are now wondering if the Sensex repeat this incredible performance next year.
Before investing in India in 2010, investors may want to consider the following points:
1. In many sectors, companies have squeezed higher profits from flat sales this year. This may not continue next year.
2. Due to the global rebound in commodity prices, the commodity sector performed extremely well relative to other sectors. However commodity prices have started to stabilize and pressure is building up.
3. Due to excessive speculation, the real estate sector also rose sharply and is unsustainable at current levels.
4. The P/E ratio currently stands at 21. This is nearly double the P/E ratio of 11 in March. The P/E ratio of 21 is very high historically and the market has become expensive. The average P/E for the Sensex is 18.
5. Food inflation is running at double digit rates due to government intervention in the market and bad monsoon. The government of India sets prices for many basic food commodities.
6. The states and the central governments are borrowing and spending like drunken sailors without regard to long-term effects on the economy.
7. A large portion of the growth in the GDP in recent quarters have resulted from government spending on infrastructure projects due to the stimulus packages.When the stimulus programs are withdrawn growth will be tempered.
Related ETFs:
1. WisdomTree India Earnings Fund (EPI)
2. PowerShares India Portfolio Fund (PIN)
3. iSHARES S&P India Nifty 50 Index Fund (INDY)
Ten Components of the Dow Jones BRIC India 15 Index
The Dow Jones BRIC India 15 Index tracks the performance of the 15 most liquid and largest stocks traded on the Indian exchanges.
As of November 30,2009 the index has a total return of 77% in US dollar terms. The dividend yield of the index is 0.95% and the annual rebalancing occurs in June.
The Top 10 Components of the Dow Jones BRIC India 15 Index:
- Reliance Industries Ltd.
- Infosys Technologies Ltd. (INFY)
- Housing Development Finance Corp. Ltd. (HDB)
- ICICI Bank Ltd. (IBN)
- State Bank of India
- Larsen & Toubro Ltd.
- Jindal Steel & Power Ltd.
- Oil & Natural Gas Corp. Ltd.
- ITC Ltd.
- Bharti Airtel Ltd.
Is India Stock Market Building Another Bubble?
The main stock market index the Bombay Sensex is up 79.6% year-to-date. Is this astonishing rise justified by fundamentals in the economy or is the Indian stock market forming another big bubble?. In this post let me present some points to indicate that the stock market in India is in fact forming a bubble that is not sustainable.
One of the main reasons the US economy collapsed recently is the long-term explosive growth of the financial sector. In the past few decade the US economy was mainly driven by the financial sector. The FIRE economy was comprised of Financial, Insurance and Real Estate sectors. Historically the financial industries that included banking, investment banking performed the simple function of lending and deposit-taking and channeling capital from investors to companies that needed them. They acted as a middle man offering a valuable service and earned a percentage of the transactions involved. Similarly the real estate industry was a boring industry that comprised of mainly building and selling homes to people that could afford them. The insurance industry also concentrated on offering auto, home and other insurance services to customers. However all the traditional roles were abandoned in the past few decades as companies evolved into high profit making machines in a short time with strategies involving high-octane risk taking. As the financial industry became the main driver of the US economy, other sectors that constituted the real economy such as manufacturing lost their significance.
The dramatic rise of the importance of the financial industry can be seen in the following chart:
Click to Expand
Source: TheAtlantic.com
Writing in The Atlantic in an article titled The Quiet Coup Simon Johnson noted:
“From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.”
Thus the financial sector’s profit alone were an incredible 41% of total domestic corporate profits in the past decade. As a result of this growth, compensation levels in the industry sky-rocketed to astronomical levels. During this bubble period, MBAs were minted by the thousands and any college graduate wanted to work in Wall Street or the banking industry and make millions.
The financial sector’s GDP share also increase significantly in the period from 1990 to 2006. In the US, it increased from 23% to 31%, a full 8 percentage points. In the UK, it was more than 10% but in France and Germany it was only in the 6% range. The chart below shows the growth of the share of the financial sector in GDP for select advanced economies since the mid 80s.
Click to Expand
Source: How might the current financial crisis shape financial sector regulation and structure?, Bank for International Settlements (BIS)
Alan Greenspan’s cheap money provided fuel to the fire culminating in the formation of the credit bubble. Once the bubble was popped in late 2007, the US economy and indeed the global economy went into a tailspin.The financial sector saw the collapse of many formerly solid and reputed firms like Lehman Brothers, Bear Stearns, Washington Mutual, IndyMac Bank and many others. The wrongfully named real estate proved to be a fake sector ending in the foreclosures of millions of homes and thousands of empty shopping malls and office buildings in the commercial space. In the insurance industry other than AIG no major failures happened since insurance is one industry that is highly regulated and is controlled by the individual states. AIG’s collapse was caused not by its insurance arm, but by its tiny financial division which played big in the derivatives market. The financial and real sector that triggered the global economic crisis was responsible for the millions of jobs that vanished overnight worldwide and trillions of dollars in wealth that were wiped out. In a nutshell, the so-called FIRE economy burned the US economy very badly.
So by now you are wondering what does the above have anything to do with the Indian economy. Well there is a lot in fact when we compare the US and India. Similar to the US, where the financial sector became a major part of the economy, the banking sector and insurance sector is growing to be a big part of the Indian economy.
The banking and insurance sector contributed less than 11% in 1990. In 2007 it amounted to about 15%. While it is still less than the growth of the financial sector in the US, it is still a cause for concern. The financial sector is growing rapidly in India and is fueling various speculative bubbles including the real estate bubble.
A few of the other factors that is inflating the bubble in India include:
1. From its March low of 8,160 the Sensex closed at 17,326 on Friday for a gain of over 100%. In the past few months Foreign Institutional Investors (FIIs) have poured at least $1B monthly in the Indian market pulling it all the way to 17K+ levels in just 6 months. While a billion $ is not much in a developed market like the US or in Europe, it has a lot of weight in emerging markets like India where most stocks do not have high trading volumes. Hence it is easy to move the market one way or the other with large bets.
Source: Frontline
The current P/E of the market is over 21.The fundamentals of the economy does not support this growth in the market. When foreign investors pulled out nearly $12B from the market the bottom fell out. Now they have poured in around $9B till September this year.
2. Due to political interference India does not have the capacity to absorb all the foreign capital flowing into the country. This is especially true with Foreign Direct Investment (FDI) where land acquistion for factories is a huge problem. According to a BusinesWeek article “What’s Holding India Back” some $98 billion in investments by business is on hold due to farmers unwilling to sell land for industrial purposes.
3. Corruption at all levels is another drag on the economy. From petty government office clerks to high level multi billion dollar military deals, corruption is common.Transparency International ranks India number 85 in its annual corruption perceptions index.
4. The Real Estate sector is the largest bubble India has ever seen. Prices of ordinary house, apartments and even land have skyrocketed in the past few years. Speculators play the real estate market like Americans did up until 2007.
5. The IT sector is given too much importance when in fact it employs a tiny percentage of the working population. Despite the foreign exchange the IT industry brings into the country, the IT industry is just considered as a cheap labor source for foreign companies looking to save money. Many domestic Indians do not trust in the IT sector helping in the development of India.
6. Exports are down at the annual rate of 20% thru September this year. Domestic consumption cannot replace the fall in exports to overseas markets.
7. In addition to the foreign capital, the majority of the current growth is coming from government spending thru stimulus plans. The government borrows heavily to fund the expensive stimulus plans. Once the spending is over growth will slow down to a trickle.
8. Stocks are rising to sky high levels without strong fundamentals. Many stocks jump double digit percentages in a week like during the dot-com bubble era in the US. Speculation is rampant with many investors trying to make a quick buck as the market keeps going up. After last years dramatic fall, irrational exuberance has returned to the Indian markets.
9. The lack of a vast bond market, forces many investors to invest in the equity market which pushes prices to abnormal levels.
Some of the Indian ADRs that trade in the US markets include HDFC Bank (HDB), ICICI Bank (IBN), Tata Motors (TTM) and Infosys Technologies (INFY) .
Are Indian Bank Stocks a Good Bet Now?
According to an article in one of the India’s business newspapers, Indian bank stocks are being bought heavily the government-owned insurance company, Life Insurance Corporation of India (LIC). This bodes well for Indian bank ADRs such as ICICI Bank’s IBN and HDFC Bank’s HDB.
The main stock market index of India, Sensex returned an incredible 68.98% in 2007.
But gave back most it in 2008 with a loss of 61.18%. As of the end of first quarter the index is down just 3.29%.As of April 29, it is up by 23.50% in the past 3 months.
As foreign investors continue to pull out of Indian equities, the insurer has been increasing stakes in many bank stocks as shown by the chart below:
Source: The Hindu Business Line, India
Note: FII denotes Foreign Institutional Investors
With a huge asset base, India’s largest insurer is a major investor in many banks and other domestic companies. As governments in many western countries continue to bailout many financial institutions, the government of India seems to have taken an indirect route to supporting the banks.The article quotes an analyst as saying “Some banks, especially those in the private sector, have grown by leaps and bounds in the last few years. They have now become systemically important. So, it makes eminent sense for the Government to have a foothold in the banks via the State-run insurance company,”
The above chart shows that the insurer has raised its holdings in HDFC Bank (HDB) much more than ICICI Bank (IBN) in 2009. ICICI and HDFC are the first and second largest private-sector banks in India and they are also constituents in the Sensex index.Currently IBN offers a 2.51% yield and has a market cap of $11.4B. On April 25th, the bank reported a 35% fall in profits in the fourth quarter over the same period last year. HDFC Bank (HDB) has a dividend yield of just 0.79%. The stock is expensive on a relative basis with a PE of 21.81. On April 31, the bank reported a 34% jump in fourth quarter profit. While the interest income, commissions and fees increased the bank’s provision for loan losses also increased indicating a deterioration in its loan portfolio.
India’s Sensex - The Wild Ride Continues
India’s stock market index Sensex closed below 10,000 again yesterday. The 2-year chart is ugly as shown below.
India Stock Market Index - Sensex Chart2-Years:
The following are my past articles about the stock market there:
India: Making Sense of the Sensex bubble
Recently I wrote:
The Incredible India Growth Story - Interrupted
More to follow in future articles.
The Incredible India Growth Story - Interrupted
Taj Mahal, India
The main stock market index in India called the Sensex plunged 606 points to close below the psychologically important level of 10,000 at 9975 yesterday(Oct 17th). After reaching a peak of 21,200 in January the index has fallen by 53% in just nine months.
Similar to the other three BRIC countries, India rode the wave up during the past few years and now the market has been hit hard as the commodity-driven economies have crashed. Foreign investors are pulling out their investments from Indian companies on a daily basis. Out of a total market cap of $680 for the entire market, foreigners have invested about $55B. Spooked by the crash in Sensex and markets worldwide local investors are getting out as well. The theory that somehow India was decoupled from other markets has been put to rest.
The last time Sensex saw the below 10,000 level was in July 2006. The P/E of the Sensex has come down to 12.6 from 28.5 back in January.While the main index has fallen 53% year-to-date this year,some stocks have fared even more. The following table lists the Indian ADR stocks traded in the US and their performance:
Indian Stocks Year-To-Date Change
| Company | Ticker | Year-to-Date Change | Sector |
|---|---|---|---|
| Dr. Reddys Laboratories | RDY | -51.65% | Pharma. & Biotech. |
| HDFC Bank | HDB | -49.80% | Banks |
| ICICI Bank | IBN | -73.80% | Banks |
| Infosys Technologies | INFY | -42.77% | Software&ComputerSvc |
| Mahanagar Telephone Nigam | MTE | -69.13% | Fixed Line Telecom. |
| Patni Computer Systems | PTI | -63.74% | Software&ComputerSvc |
| Rediff.com India | REDF | -74.24% | Software&ComputerSvc |
| Satyam Computer Services | SAY | -46.15% | Software&ComputerSvc |
| SIFY | SIFY | -70.27% | Software&ComputerSvc |
| Sterlite Industries | SLT | -79.59% | Indust.Metals&Mining |
| Tata Communications | TCL | -52.20% | Fixed Line Telecom. |
| Tata Motors | TTM | -70.36% | Industrial Engineer. |
| Wipro | WIT | -44.07% | Software&ComputerSvc |
| WNS Holdings | WNS | -51.80% | Support Services |
Chart
Click on image to enlarge
As seen in the above chart, some of the stocks like IBN, TM are down over 70%.IT services stocks like SAY,WIT,INFY seems to be holding well now.But they may face tough times if US companies reduce or cancel off-shoring projects.
Due to domestic and overseas market conditions the index may take some time before finding a stable level. While in the long-term “The Incredible India Growth Story” may be intact,however in the short-term it has been interrupted.
