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How to Profit From a Pause in India's Booming Stock Market -- Barrons.com
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By Reshma Kapadia
Indian stocks have had almost as impressive a run as the U.S. market. Investors who feared they missed their chance could have an opportunity to get in as the bull market takes a breather.
The MSCI India has averaged a 21.8% annual gain since March 2000 -- just behind the 22.7% gain logged by the S&P 500.
As global investors soured on China as its economy sputtered amid Covid and geopolitical tensions, many gravitated to India. They found an economy remade by a decade of reforms and aggressive investment in infrastructure. That energized entrepreneurs, supported a burgeoning middle-class, and made India a more attractive manufacturing destination for global companies looking for an alternative to China.
But while most strategists expect the U.S. bull market to keep charging ahead into 2025, the Indian market has started to lose momentum. Some veteran investors waved the caution flag in recent months as euphoria infused the market. The country's red-hot initial public offering market raised more than $16 billion this past year, more than double the take of the year before. Hyundai Motor's India subsidiary raised a record $3.3 billion in the market but the stock fell after its October debut.
"We are setting up for a major correction in India," predicts Ajay Krishnan, who manages Wasatch Emerging India and Wasatch Emerging Markets Select. "There is a lot of froth, with cement companies and low-quality banks trading at 50 times earnings as companies chase what has worked."
Indian stocks have started to pull back, with the MSCI India down 7%TK since September. Yet the market is still pricer than the S&P 500, at 23.8 times forward earnings compared with 23 times for the S&P 500.
And growth, while still stellar compared with much of the world, is beginning to slow in the world's most populous country.
Pranjul Bhandari, chief economist of India and Indonesia for HSBC, said in a note to clients that India's growth is slowing from 7.5% to 8% over the past couple of years toward 6.5%. After Covid, much of the growth has been fueled by spending from the government, but authorities are now shifting their focus to shoring up the country's fiscal health and pulling back on investment.
"You really need the [spending] baton to shift to the private sector. That is key for sustainability of this cycle. The public sector is done with the heavy lifting," says Jitania Kandhari, head of macro and thematic research for Morgan Stanley Investment Management's emerging markets equity team.
Weakening growth and high valuations pose a risk, at least near-term, to the bull market. "The equity market rally has been led by domestic investors but we are starting to see early signs of waning enthusiasm," says Shumita Deveshwar, chief India economist at GlobalData TS Lombard.
One area investors are monitoring is the health of the consumer. While rural consumers have been reluctant to spend and are rebuilding their savings after a relatively strong crop season, signs are emerging of weakening consumption among city dwellers, which account for a third of GDP.
Consumer credit is weakening and wages in high-paying sectors have softened. Consumer staples giant Hindustan Unilever reported anemic underlying volume growth of 3% in the second quarter, below that of parent company Unilever for the first time in a decade, says Ramiz Chelat, a manager at Vontobel Asset Management.
"If the slowdown is related to weaker employment growth, that would be a concern and indicate the broadening of growth beyond infrastructure and property capex oriented parts of the market isn't happening," he says.
But there are buffers that could limit a slowdown and market pullback. Strategists note that foreign investors have pared their holdings and are largely neutral on India.
On the economic front, Kandhari notes that companies have strong balance sheets and the banking system is flush with liquidity. Plus, the Reserve Bank of India has moved from tightening policy to a more neutral stance, which could boost growth in the second quarter.
Even those who see room for a pullback near-term are upbeat about the longer term outlook. Krishnan notes that manufacturing is taking hold, which will create jobs and its own momentum over the-long-term. For example, Tata Group is trying to rival contract supplier Foxconn Technology and has taken stakes in companies that Apple is using to build its products in India.
While Krishnan sees potential stress in some consumer-oriented companies, he expects higher-quality financial companies like Bajaj Finance and HDFC Bank to do well next year. Chelat also favors financial companies, including ICICI Bank, which is seeing midteens loan growth as it takes market share from rivals. It trades at about 17 to 18 times earnings.
If the government is able to push for more deregulation and make another go at structural reforms that focuses on improving education and the job prospects of its young burgeoning workforce, it could re-energize the market, Deveshwar says.
Jorry Noeddekaer, lead manager who oversees an emerging markets strategy for Polar Capital, pared his allocation to India earlier in the year as stocks hit the fund's targets, diversifying to more attractive opportunities in the U.S. and elsewhere.
More recently, he has used the pullback in India to buy back some stocks. Noeddekaer, however, is tempering expectations: "India is less of a standout now on a relative level than some years back and we don't expect, in the near-term, to go back to the very high overweight we had in the past."
Write to Reshma Kapadia at
reshma.kapadia@barrons.com
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