As India goes to the polls, growth outlook remains strong

With India's fifteenth general election underway, investors should expect the stock market to remain volatile until the results are announced next month.

Nevertheless, on a longer term basis, India still looks attractive, according to Sam Mahtani, Director of Emerging Equities at F&C.

Mahtani explained India is experiencing an investment-led slowdown as higher interest rates and weakening demand bite into the real economy. However, rural India, which accounts for around 70% of the population and one third of GDP, continues to remain relatively insulated helped by higher crop prices and several large government programmes. Mahtani believes that this will sustain overall private consumption, which has grown by 6% this year.

"I believe that the Indian economy will turnaround within the next couple of quarters, possibly earlier given their slowdown began in January 2008," Mahtani said. "Indeed, some of the recent statistics for sales of cement and consumer durables suggest the economy may be starting to turn now, ahead of consensus views".

Inflation has now peaked and fallen to 0.4% pa and Mahtani feels inflation is not a concern, given the high base affect from a year ago. India is clearly a beneficiary from the drop in oil and commodity prices, which have a high weighting in the country's measure of inflation, the WPI index.

Monetary easing continues, with India's central bank cutting its key benchmark rate by 25 basis points this week to a record low of 3.25%. Foreign investors have sold a net US$563m so far this year and foreign ownership levels have dropped to the same level as 2003. As such, Mahtani believes that perhaps the bottom has been reached in terms of selling by foreign investors.

"The Indian stock market has been one of the better performing markets this year, rallying 16% YTD, however it has rallied 35% from its low point in early March 2009. The MSCI India is now trading on 12.4x for 2010 (calendar year), which still offers value for investors prepared to take a medium to long-term view on India's economy, however in the short term we could see some consolidation and a small correction given the sharp run up from the low point in March", he added. Currently, Mahtani's favoured stocks include HDFC, the leader in the mortgage market within financials, and Jindal Steel & Power, an integrated steel manufacturer which has just commissioned a large 1000MW power plant. Mahtani believes that, at this early stage, either a BJP or Congress led coalition government should be supported by the market whilst a ‘left wing' led coalition, although not likely, would be taken negatively.

"We continue to expect a further easing of monetary policy going forward and strong domestic demand to drive 5.5% of GDP growth, making India the second fastest growing economy in the world after China", Mahtani concluded.