Emerging markets are seeing increased allocations from the global fund
managers. Valuations in the developed markets in the US and Europe are
relatively more expensive and with concerns over the economic recovery
and the currency, more and more international fund managers are looking
at Asia very closely and are increasing allocations. There is a strong
feeling among policy makers across globe that US $ is overvalued and
many currencies in the emerging markets are undervalued notably Chinese
Yuan and Indian Rupee.
With surging exports of services i.e. software & BPO,
pharmaceuticals, auto components, engineering equipments &
textiles. India is sitting on an all time high foreign exchange
reserves. The Indian rupee is likely to remain strong in the near term.
India outsourcing story is not just restricted to software services but
is now extended to BPO, generic pharmaceuticals, automobiles, auto
components, textiles and select other manufacturing sectors. More than
100 multinational companies have set up their research labs in India
and this alone will bring in vital foreign exchange and jobs
opportunities within the country. India has one of the best
demographics in the world. Purchasing power adjusted GDP of US $ 3
trillion makes India the 4th largest economy in the world next only to
US, China and Japan. India has one of the highest savings rate and
lowest level of retail debt to GDP at 6%. This along with the fact that
interest rates have virtually halved over the last two years should
lead to a consumption led demand growth in the economy.
Equity markets in the last five months have rallied sharply. The BSE
sensex has moved up by over 1900 points in less than five months and
along with it the sensex forward P/E has moved up from less than 10
times to around 14 times. Will the rally in the equity market continue
is the question every investor seems to be asking? With a sharp upward
movement of almost 1900 points, 10 - 15 % correction is quite likely
but let us look at the basic fundamentals to address the question of
whether we are close to the top?
Unlike many rally in the past, this time the rally is based on a strong
fundamentals. A study of the indices along with the then prevailing P/E
ratio and interest rates clearly indicates that equity market has not
yet fully discounted the structural change in the interest rates and
increase in the corporate earnings over the last three years. The
corporate sector profitability has gone up due to restructuring
exercise undertaken for last several years, significant drop in the
interest rates and manufacturing rationalization. The southwest monsoon
has progressed very well and the progress is one of the best in last 10
years. This will lead to further improvement in consumer confidence and
buying power. The productivity of capital has gone up with indices ROE
at around 18 % and cost of equity at around 11%. The bond yields are
down to around 5 % whereas equity net profit yield is still around 7 %.
There is a strong feeling that the next round of growth in the world
economy will come from Asia and it will be largely driven by China and
India. India has carried out lot of grass root level changes that
encourages businesses. There are several companies in the Software,
Pharmaceuticals and Automobiles that can compete with the best
companies in the world.
Best demographics, large domestic market, low interest rates, growing
exports of services, pharmaceuticals, auto components and textiles,
improved corporate fundamentals, attractive valuations make India an
attractive proposition for the investors over the next one year.
So, the question is, how best to invest in such an opportune sector.
There are several mutual funds that encompass ideal corporate stocks
that embrace the growth prospects. Best to speak with your financial
advisor before embarking on such a program.
This article was prepared by John Klotz. John is Vice President of Financial Services at LMS Prolink Ltd. You can reach John at johnk@lms.ca or phone (416)-595-7484 ext. 305.