Global investors have been pouring money into India following the clear mandate awarded to the new government led by Prime Minister Narendra Modi. Investor expectation is that Modi will be able to carry out structural reforms.
The surge in indices amid this euphoria has stretched valuations, sources said.
Sean Taylor, regional investment head APAC & head of emerging markets, Deutsche Asset and Wealth Management, is among those who see a correction.
Amundi Asset Management echoed similar views while Matthews Asia raised concerns over the implementation of reforms.
“India is vulnerable in the short term and a correction in the first quarter will pose a buying opportunity. Currently, it is not a cheap market and earnings growth and economic activity may be disappointing in the first quarter,” Taylor said.
However, over the medium term, he believes India has at least three years of double-digit gains, driven by corporate earnings growth as a recovery in investment takes place.
“Prime Minister Modi is laying down the foundations for a broad investment recovery – with key reform initiatives including land acquisition law, labor reform and the introduction of a national goods and service tax,” Taylor added.
Furthermore, the Reserve Bank of India is expected to continue to cut interest rates as inflation falls, which should lead to lower lending rates and a pick up in credit growth.
“[The RBI rate cut] will help fuel economic growth. This is very positive and make us constructive on both Indian bonds and equities in the medium term,” Taylor added.
Careful stock selection
Josh Crabb, head of Asian equities at Old Mutual Global Investors, believes careful stock selection is critical step in maximising returns in India.
“Certain shares, particularly in the consumer goods sector, cannot compensate investors sufficiently for the risks of holding them. Several of the consumer names such as ITC and Hindustan Unilever, for example, have very stretched multiples,” he said.
“However, if investors move away from the herd, there are still interesting opportunities in the India market.”
Crabb sees opportunities in mid-sized companies and in infrastructure segments like power and steel companies.
Crabb highlighted India’s infrastructure sector, which has had decades of underinvestment and continues to be largely overlooked by investors. As a result, several of the infrastructure company stocks trade below book value.
“With inflation on a declining trend, those companies with large fixed asset bases, such as power generation companies and steel companies, could also be attractive,” he said.
“If Modi realises his election promises to accelerate economic reform, further interest in this sector should increase.”
