Private Investor: Beware of the tiger in Indian stock market

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The Independent Online

To be honest, I wasn't planning on writing about India again quite so soon, but the gyrations in Mumbai (sounds a bit like a Bollywood film title, don't you think?) have rather forced my hand.

Last week the Indian stock markets performed the most astonishing feats of acrobatics, falling then rising by 10 per cent on successive days. The reason wasn't hard to find, though why investors should have been quite so spooked by a well-anticipated story is a little beyond me. Anyway, the market tanked when it was thought that the Indian government, obviously concerned about the vast flows of foreign money flowing into the country, indicated that it might like to impose some requirements for transparency and information on foreign banks and investors. The next day, having seen the market reaction, Delhi seemed to ditch the plans. Since then the market has recovered, and isn't that far off its recent peaks.

Such is the lot of the investor in emerging markets. You might call it "riding the tiger", to draw an apt analogy. My view is that, like the unfortunate figure who might find themselves atop the tiger, the best answer is to stay on and cope as best you can with the choppy ride and the constant fear of oblivion.

The temptation to jump to safety has increased, though. There's a worrying tendency for the Indian government to roll back on its gradual but very welcome exposure to the wider world.

The real danger now is that so much money is flowing out of Western markets towards the East, in search of those elusive higher returns, that everyone seems to demand now. Nothing wrong with that, except that you wonder precisely how sustainable such flows are. After all, sooner or later the world will get through the credit crunch, the banks will face up to their responsibilities, take the hits and move on to a slightly saner existence. By the time that happens, the money that has flowed into the emerging economies may start to leech back, with the obvious effect on stock indices.

Second, you have to worry that what we're witnessing is a fairly undiscerning approach to investment, and one that simply feeds markets that are already displaying signs of bloating. For as long as most of us can remember, there has been a general expectation of a collapse in China, where virtually any article about her equity and property markets contains the word "bubble" somewhere in the opening paragraph.

The Chinese stock market in particular has been an accident waiting to happen for some time, with unforeseeable but serious consequences for the world economy, as well as those over-optimistic Shanghai cabbies who've put their life savings on the market. This is one reason why I've steered clear of the China story, wonderful as it is, because the prospects for the real economy there have become fatally decoupled from the behaviour of the stock market.

Not so India, I had thought, but recent developments call that into question. If anything, I have some sympathy with the Indian government, as they too must harbour the same concerns that longer-term investors such as I have – the damage that a short-term bubble will have on the long-term attractiveness of investing in Indian business. (And, by the way, lifting yet more millions of Indians out of poverty.)

So that's my worry. For the moment, in line with my long-held investment policy of drip-feeding into this volatile market, I will stick with my own chosen retail vehicle, the JPMorgan Indian Investment Trust (there are a few others). But if you're going to follow me into this lush jungle you have to be sure that you're ready for a very rough and unpredictable journey. As I say, riding the tiger isn't always fun.

A last line on another favourite stock: Google. My hunch a few weeks ago was right and I see the shares trading at ever-higher levels, surpassing the prices reached during the dot.com boom, so demonstrating the virtues of patience when it comes to investing. The results were excellent. Google is, I learn, the most widely held share in the US; so not only do they all use Google, but they all own it as well. When a company has that sort of hold on the affections and finances of America, you wonder where the limits of its power might be. It hasn't yet passed its peak.

s.ogrady@independent.co.uk

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