Mark Dampier: Savvy investors keep eyes peeled on India
Saturday 26 February 2011
I last wrote about the Jupiter India Fund in November, but an update might be worthwhile because the Indian stock market has performed particularly poorly over the past few months. Since the start of the year the fund is down around 15 per cent, although some of this is accounted for by the fall in the rupee. Global fund managers are partly to blame, cutting their weightings to emerging markets to their lowest levels since March 2009, according to a recent survey. However, India has excellent long-term potential, and in the past any sustained falls in the market have provided an outstanding buying opportunity.
The problems for India began in November with the telecoms scandal, which produced allegations of bribery and abuse of political power, with the telecoms minister being arrested. This has positive ramifications for investors in that it is a sign the Indian government won't tolerate corruption. This was only the start of the challenges.
India imports much of its oil and food has been susceptible to recent price rises. Onions, too – a staple of Indian cooking – rose four-fold because of unusually heavy rains, and this alone has been enough to cause serious unrest in the past. Avinash Vazirani, manager of Jupiter India Fund, feels the fears of inflation and interest rate hikes have been exaggerated. He points out inflation has fallen from a high of 12 per cent in the middle of last year to about 8 per cent now. Food price inflation has been exacerbated by infrastructure deficiencies. Roads and railways are improving, but some 18 million tonnes of grain was left to rot because it couldn't be transported in time.
Gradually, India will address these issues. Mr Vazirani says that food inflation is not necessarily bad for the country as a whole as the majority of Indians live and work in the rural community and stand to benefit from price rises. Rural wages have improved markedly since last year, far in excess of inflation, and this is leading to a much higher consumption of goods and services. Interest rates have risen seven times since October 2009 to the present 7.2 per cent. Mr Vazirani believes they will rise by only another 0.5 per cent – less than most are anticipating. If he is right the market could rally once it is perceived interest rates have peaked, and the forthcoming budget may be a catalyst to show that India's financial problems are not as bad as investors believe. Mr Vazirani also highlights the considerable impact biometric cards will have as they are rolled out, and he expects 100,000 a day to be being issued by June. This could improve government finances, enabling taxation and benefits to be targeted more precisely.
He hasn't been this positive on the prospects of individual companies for a long time. In terms of valuations, the market is on a price-to-earnings ratio of about 14 times March 2012 earnings – a more expensive rating than other emerging markets but still reasonable, given the make-up of India's economy and a bias towards the IT and consumer sectors. Many Indian companies are good value relative to their Western counterparts, despite serving a young, vibrant population that is becoming wealthier. So keep your nerve with the Indian market. Further falls cannot be ruled out but the correction is providing a good opportunity to top up.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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