India's stock market surged to a two-year high in April only to lose steam as investors grew more worried about the European debt crisis and the chance that contagion could slow a global recovery.
While the subcontinent still isn't a bargain hunter's paradise, some observers say the recent market tumble could be a good entry point for those willing to invest for three to five years.
The Bombay Stock Exchange's Sensex index closed Tuesday at 16,022, down from a recent peak of 17,970. The index, which has surged from its low of 8,160 points in March, 2009, is still off its record high of 20,873 in early 2008.
"We are bullish on the Indian economy over the next 10 years, and the market should follow over time," said Sanjiv Duggal, investment director at HSBC Holdings PLC's Halbis Capital Management in Singapore. "The stock market should deliver roughly 13- to 15-per-cent per annum on average."
But India is "not a smooth story," warned Mr. Duggal, who runs HSBC Indian Equity Fund. "It is a volatile, choppy ride.… If you need the money after a month or six months, then I would not invest in India. You could end up losing money.… Longer term, the odds are in your favour."
The Indian economy is marching at a "good clip" with gross domestic product growth expected to accelerate to 8.5 per cent by the end of March, 2011, compared with an estimated 7.5 per cent for the recent fiscal year end, he said. "The global recession and credit crunch didn't really impact India that much … India is more of a domestically driven economy."
The market, he says, is nowhere near the point when, in December, 2007, he became bearish on the frothy Indian market and basically suggested that investors "exit" his India funds. The market was "too expensive" at 25 to 30 times forward earnings, he recalled. "People were valuing dreams."
Currently, the Indian market is trading at 16 to 17 times forward earnings, which is slightly above the five-year average, he said.
Ajay Argal, who runs Excel India Fund, agrees the Indian market is not cheap, but not expensive either. "We think the market is fairly valued," said the co-head of equity Investments with Mumbai-based Birla Sun Life Asset Management Co. Ltd.
But India is not immune to global events, and Europe's woes have put "pressure on the risk appetite of global investors" whose fund flows are key to a continuing rally near term, he said.
"While markets may look soft in the short term … India will come back because earnings momentum is very strong," said Mr. Argal, who likes the infrastructure, capital goods, construction and pharmaceutical sectors.
"We are expecting [year-over-year]profit growth of more than 20 per cent for the next four to six quarters," he said. "Every quarter that profit growth comes out, we think markets will get more and more confident, and will gradually start going up as we get closer to the end of this calendar year."
Any market weakness provides a good entry point for investors, but "there is no point looking at two or three months," he echoed. "You should at least have a three-to five-year view."
Arthur Budaghyan, managing editor for emerging markets strategy at BCA Research in Montreal, expects the Indian market will "do better than other emerging markets over the next six months to a year." Softening global commodity prices will help to reduce India's inflation problems, and will remove pressure to hike interest rates further, he said. "At the margin, that is a positive for the stock market."
But if Europe and other global markets are heading south, "I don't think India can go up," he said. "But that has nothing to do with India."
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