India's stock market may look attractive after its massive slide, but there's probably more pain to come. A host of economic and political challenges could keep a new bull market at bay for more than a year.
FOR THOSE TEMPTED TO WADE INTO THE INDIAN STOCK MARKET with a view to making a quick killing after its massive slide, consider the advice that Punch magazine once gave a person who was about to marry: Don't.
Although India's benchmark Sensex has fallen about 55% from its peak a year ago, the market is still not attractive as a short-term investment. November's terror attacks in Mumbai aren't even the half of it: The Indian economy, valuation issues and broad political uncertainty all argue for real caution.
"Even as absolute valuations have corrected, India's relative valuations remain rich," says Ridham Desai, India Strategist at Morgan Stanley. The market's price-to-earnings multiple, based on expected earnings for the next 12 months, is 60% higher than that of emerging markets as a group. And its price-to-book ratio is a whopping 72% higher.
India fares no better on the dividend-yield front. The roughly 2% dividend yield on the Sensex pales in comparison to what is available in some of the more advanced economies. The dividend yield for the Australian market, for example, is an eye-popping 6.5%, while most other regional markets offer yields well north of 5%.
JUST HOW FAR THE INDIAN MARKET got ahead of itself in recent years is borne out by comparing the total market capitalization with gross domestic product. In May of 2007, India's market capitalization overtook its GDP; by January 2008, it had climbed to a frenzied 180% of GDP. In comparison, the ratio for the U.S. market at the height of the dot-com boom was 131%. The ratio for Japan at the peak of the market was 150%.
Those heady days for the Indian market seem distant now. In July the market-cap ratio dropped below 100%, indicating saner valuations. But the market's considerable fall since July doesn't make a persuasive case for a quick return of faith. Any investor betting that the market will go right back up in the short term is essentially saying that there will be an India equities bubble all over again.
One of the biggest reasons for the surge in the Indian equity markets was the inflow of funds from foreign institutional investors. But that luck hasn't held in the current bear market: Foreigners have pulled $20 billion from the market since the start of 2008, according to provisional data issued by the Bombay Stock Exchange.
A new bull market, Morgan Stanley's Desai argues, is at least 15 months away. "Even if we assume that the market has hit its bottom, previous bear markets show that the market almost always tests the previous low before a new bull market gets underway," he says. "This process of retesting took between 15 and 24 months in the previous three bear markets."
The Bottom Line:
A new bull market in India may be at least 15 months away, thanks to a host of economic and political challenges
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