India's stock market has gone up by 571 per cent in the last four-and-a- half years. A return like that here in the US would put the Dow over 55,000 today. Not likely to happen any time soon...But is the staggering run in India sustainable?
Our friend and colleague Karim Rahemtulla just got back from a 17-day "on the ground" research trip to India. Karim, the investment director of Mt. Vernon Research, is one of the shrewdest investors I know.
And when it comes to India, he's our go-to guy...This is Karim's third fact-finding mission to the country in recent years. This time, he met with government officials and key personnel at some of India's biggest companies HDFC Bank, Infosys and Satyam.
He also met with the folks from Quantum Funds and Zee TV India's mega media conglomerate, whose operations span satellite broadcasting and cable distribution to music publishing and the creation of animation software.
Karim shares some of his findings with Alex Williams, publisher, Investment U Alex Williams: In five years, will investors be kicking themselves for not buying into India's stock market today?
Karim Rahemtulla: Yes, most certainly they will. But today is not the exact time to be buying into the Indian market. It's overvalued by almost any measure, and due for a sharp correction within the next 12 months. That will be the opportunity.
I would say anything under 12,000 on the BSE constitutes a buying opportunity.
Right now, India is enjoying a tremendous amount of foreign investment. These dollars, yen, pounds, and euros are chasing a very illiquid basket of stocks never a good idea. Just consider that of the 7,000-odd companies listed in the Indian markets, fewer than 300 have trade volume of more than $1 million per day. That's about what a small-cap stock trades in the U.S.
AW: How does the growth rate look like in India, compared to, say, China?
KR: It is very similar, averaging in the high single digits. But India has a much lower base from which to grow
GDP-wise, it is far behind China. The country has no export market to speak of outside of outsourcing and technology. And it has a very weak and fragmented manufacturing base. You don't hear about "Made in India" for a reason. That being said, when you start from a lower base and have the momentum at your back and the will to move forward the future looks bright if you buy at the right time.
AW: What about India's middle class? What are they spending their money on?
KR: Washing machines, flat screens, cars and eating out. Sounds familiar to the U.S., doesn't it?
India has its own idea of the American dream, but it is slightly different in that it is about 30 years behind. The use of credit cards and mortgages is just starting to catch on. And this will have a multiplier effect on the economy; it already is. This will allow