India has some huge advantages – a large, young population, a strong export sector and some world-beating companies. And a new way of paying benefits to the poor should give a lift to Indian banks and the wider economy. So is it a perfect time to invest?
Bold investors who took a punt on India 20 years ago would be sitting pretty today, having turned £1,000 into £6,700. China may be rivalling the United States as the world’s foremost superpower, but it trails the Indian stock market – a two-decade long investment in the Chinese index would have left you out of pocket, according to figures from Lipper.
This week, India’s prime minister vowed to get the economy back to the days of 8pc growth – up from 5pc forecast for this year. Manmohan Singh believes that sentiment is suppressed and is predicting big things for India’s economy – and its companies.
“Business mood, which was unduly optimistic in 2007, is unduly pessimistic today,” Mr Singh said.
He may have a point. Indian stocks are cheap as chips compared with historic prices, so much so that punchy investors are calling it a buying opportunity and waiting for the bounce. We lay out the case below.
GDP per Capita
There is a fairly strong correlation between the rate of growth of country’s GDP per capita and the returns in that country’s stock market. Below is a list of a few countries to give you a sense for the correlation. On average, returns in the market are roughly double the long term growth rate of GDP per capita.
This data was taken from the last available GDP per capita from the World Bank, as of 2011. Since that time some of these markets have gone up significantly.
India has been hyped for a while now as the next great investment opportunity after China, which has been mired in a controversial debate as to whether or not its growth can continue. Stories of ghost towns, rapid inflation, and wage growth that is making its labor more expensive have all contributed to a good deal of skepticism about the investment future of China. Some of these stories are true and some are embellished to aid short sellers in their hopes to drive stocks lower. Longer term, with a GDP per capita of $5,445 as of 2011, there is still a good deal of room for this country to grow. Right now China is going through a transition phase, though, as it focuses its energy on domestic growth supported less and less by exports. This is due in part to the aforementioned rising wages that is causing companies in the US and elsewhere to bring manufacturing in house or to migrate to other countries like Vietnam and Singapore. This transition will take time, though. In the meantime, I believe the baton is being passed on to India for a variety of reasons which I will lay out below. And I believe it is presenting a unique opportunity for investors to capitalize on a potential huge boom in India stocks.
economic growth –
Indian economy is expected to pick up and grow in the range of 5.5-6.5 per cent in 2013 even though government steps for new investments have been “relatively small in scope”, Moody’s said today.
Citing cautious private sector and relatively high inflation, the global rating agency also said that the country is struggling to boost investment and economic growth.
Based on its central forecast scenarios, Moody’s Investors Service has estimated that Indian economy would see 5.5-6.5 per cent growth in 2013, as against 3.9 per cent last year. The growth is projected to improve further to 6-7 per cent in 2014, it noted.
According to Moody’s, one percentage point range in the forecast is to “avoid spurious precision” and to focus on significant changes that could potentially influence rating decisions.