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Foreign investors have put over $5 billion into India this year, 80% of which is in Indian stocks, pushing the Bombay Stock Exchange Sensex up 56% since April. Only $740 million came from foreign investors in 2002. The rush into India began in May and portfolio investment peaked in mid-October, before correcting sharply on October 23.
Indian companies have restructured and domestic consumption is expected to grow from $250 billion to $510 billion in the next five years. New sectors have appeared. Insurance is open to foreigners and outsourcing has grown. There are more young people earning more than ever and ready to spend. “When foreign investors look at emerging markets India stands out for all these reasons,” says Andrew Holland, executive vice-president of research at DSP Merrill Lynch.
A Merrill Lynch report in August predicts that Indian GDP will double in nominal terms in the next seven years, led by rising consumption, adding that this could happen in five years if investments were to kickstart in the next two to three years. It expects the services sector to lead the way, growing at 8% to 8.5% and creating about a million jobs annually with banking, telecoms and media companies leading the way.
The Boston-based EmergingPortfolio.com Fund Research report published in October puts India among the top five destinations for emerging market fund flows for the period from July to September.
Sanjay Prakash, head of HSBC Asset Management in India, who advises the $400 million HGIF India Equity fund managed by HSBC Europe, says there is a shift towards India. HSBC also manages an offshore China fund. Over the past year, the India fund has grown from about $78 million to $400 million, giving investors a return of about 84%, higher than the China fund, which grew from $180 million to $664 million, he says.
The rupee has appreciated by over 5% this year, unlike the yuan, which remains undervalued, and this has enhanced dollar returns to foreign investors. The number of portfolio investors registered with the Securities and Exchange Board of India has grown from 489 at the start of the year to 510. The entry of several hedge funds into India, particularly into small and medium-size companies, might indicate that concentrated bets are being taken on these companies. This bull run is the first since India introduced trading in equity derivatives three years back, and foreign participation in Indian futures and options has risen sharply.
IT services, where India’s prowess is well known, has given way to sectors aligned to the economy such as cement, steel, aluminium, banking and auto parts. Prakash says they are the best bets given that the business cycle is on an upswing.
Yet two things appear to be missing. In June the Rs10 billion ($222 million) IPO by Maruti, the car-maker, seemed to have started the bull run in the primary market. But apart from a few public-sector banks, there is no rise in issuance from private companies that would indicate a pick-up in investment. Bankers say a few issues, including by Indraprastha Gas, television channel Aaj Tak, Dredging Corporation and Biocon are in the pipeline but are few and small. There is little evidence of increased demand for bank credit from corporates.
Second, foreign direct investors are not so optimistic about the Indian economy. Donald Peck, who heads CDC Capital Partners, a private-equity firm that bought a stake in Punjab Tractors for $50 million, is sceptical about the run-up on the stock markets. That, he says, has more to do with a “switch in allocations” by portfolio fund managers than any real, sustainable change on the ground. “A few private-equity deals closed around July/August when the markets were rising. But prices have moved up fast and assets are not cheap any more,” he says.
As HSBC’s Prakash adds, there is still the political risk in India, such as local elections next month and a general election next year, or border hostilities arising again with Pakistan. Perhaps the picture is not as rosy as the stock markets would have us believe.
