Stock market activity in India not reflecting opportunities

JPMorgan Asset Management says current stock market activity in India is not reflective of the investment opportunities in the region.

Speaking at a recent web conference Ted Pulling of JPMorgan Indian Investment Trust told investors, "India is currently in an excellent earnings environment and is the second strongest growing economy after China. GDP is currently around 8.8% and, whilst we do expect a deceleration in the short term, future economic growth will be sustained at 7.5% to 9% over the longer term."

Pulling said the Indian market is down in US dollar terms partly as a result of investor sentiment and the rupee losing ground (US$ performance -24.7% year to date to 31 May 2008). India is a large importer of energy, importing over half of its energy, including oil and coal. As a result the trade deficit in India has widened as energy costs have gone up, which has had a knock on effect to the cost of importing and the value of the rupee. Despite this Pulling said he expects to see the exchange rate stabilise and is confident India has the reserves to ensure this is not a long term issue.

Pulling is the lead manager for the JPMorgan Indian Investment Trust. With a team based in both India and Hong Kong, the trust has returned 33.4% over one year, while the benchmark, the MSCI India Index, has returned 30.8%, after a very strong 2007. Over three and five years the trust has returned 188.4% and 661.8% respectively, while the benchmark has returned 204.3% and 480.9% in the same periods.

Looking at the investment opportunities in the country, Pulling is confident there are three main growth areas within the region that demonstrate India's growing stature in the global market place, namely infrastructure, investment and urbanisation. As such the portfolio has been positioned to utilise these growth areas, with top sector holdings including energy, financials, industrials and information technology.

Touching on infrastructure the manager talked about India's 5 year plan (2007 to 2012) to spend $500bn on much needed infrastructure. The result of better road systems and ports is expected to lead to increased flows of activity. At present power is twice as expensive in India as it is in China, with half of the population having no access to any power. The result is a potentially serious impediment to economic growth, but the infrastructure plans mean that these issues will be addressed.

Talking about urbanisation Pulling said, "We already know that urbanisation has led to an increase in consumption. At present 30% of India's population lives in cities, but we expect this number to increase by around 5% over the next decade. This large population shift will lead to greater demand for consumables."

Following a recent visit to India, Pulling also found financial circumstances for individuals are expected to dramatically improve. For example, there are 20 million credit cards in circulation in India, but it is estimated the market potential could be as big as 180 million. Similarly the number of Indians with bank accounts is expected to grow to 500 million, which at present are a fraction of this figure.

Pulling highlighted that this growth is also possible due to positive demographics of a young, working population, with 50% of Indians under 21, meaning country growth and development can be sustained.

Despite the long term opportunities in India, Pulling did warn there are some short term risks and challenges which will impact the markets in the short term. He mentioned the forthcoming national election in 2008-2009 where policy uncertainties are a concern to investors, along with rising inflation which is not helped by government subsidised oil prices. Additionally the trade deficit, high interest rates and elevated commodity prices are all impacting the stock market.

However, looking forward Pulling said, "It could be a long summer, but we will continue to see corporates making a profit even though stock markets will continue to be volatile. Going into 2009 I think the stock market will look much better while the economic slow down will run its course and consumption will improve, which will result in a reacceleration of growth in the region."