Outlook Of Investments In India

On November 26, the Bombay Stock Exchange that still bears Mumbai’s colonial name closed nearly 4% higher in a rally that anticipated an interest rate cut. That was mere hours before gunmen seized several sites in the city’s landmark hotels and social gathering places.

Approximately 200 people died and 350 were injured inside the next few bloody days, but when markets opened again on Friday, the Sensex benchmark actually gapped up for a gain.

On Wall Street, the NYSE-traded WisdomTree India Earnings Fund ETF (EPI) was boosted by high volume at Friday’s post-Thanksgiving open, and closed even on the day.

The ETF reflects the broad base of Indian stocks that international investors can tap.

EPI is well diversified into heavy industry, consumer goods, health products, and energy. Most of EPI’s leading holdings like Infosys (INFY) and Dr Reddy’s Pharmaceutical Company (RDY) trade individually in New York and London, as well as in Mumbai.

These are the kind of Indian blue chips you should keep your eye on for long-term growth as the Mumbai mess gets sorted out.

Restoring Confidence in Indian Investments After the Mumbai Attacks

Over the weekend, Prime Minister Manmohan Singh chose Finance Minister Palaniappan Chidambaram to replace Home Minister Shivraj Patil. Patil’s ministry is in charge of national security, which suffered a clear failure last week.

Singh, who holds a doctorate in economics, will take over the finance ministry himself. Holding both the national leadership and becoming the top moneyman puts Singh in clear leadership in this time of turmoil.

Smart leadership is what emerging market investors crave right now, and even before Singh’s move Indian investors were impressive with their resilience in the past week. In fact, the market has seen a huge flight of foreign capital from India in the past year, not out of doubt about India’s growth potential, but due to a general aversion to risk.

As credit tightened and commodities boomed then busted, “uncertainty” became everyone’s worst enemy. Emerging markets like India and China have been the first places where many funds many funds look to raise cash by selling shares.

Financial Express, India’s leading economic journal, reported that foreign institutional investors (FIIs) had sold more Indian stocks than they bought going into last week, with net sales totaling $13.7 billion in 2008. As foreign funds sold, however, Indians snapped them up, and they are of course the primary long-term stakeholders in the Indian economy.

So domestic Indian investors are looking at the same kind of indicators Wall Street is poring over, in order to determine the onset and depth of a global recession. In India’s export-oriented economy, lower consumption abroad means lower industrial output and job losses at home.

New Indian Economic Data and Outlook

December opened with the announcement of India’s first export drop since 2005, with a 12.1% year-on-year decline. On the other hand, imports are up, and oil imports are up by a whopping 22% from this time last year.

This heavy oil buying is actually a positive leading indicator. Indian energy planners are bullish on growth, and thus energy use, so they’re taking advantage of the current crude price trough to stockpile resources for the future.

Even with these mixed data, the Sensex (^BSESN) rolled into Monday nearly 2% points higher. It was actually weakness in European markets like London and Frankfurt that dragged Mumbai down by 2.5% by day’s end.

So the distinction between international market pressure and local concerns is important to Indian investments. There is also a difference between the decline in foreign institutional investment (FII) mentioned above and foreign direct investment (FDI), which may step in to fill holes left by the credit crunch.

FDI often takes the form of financing for things that will last and have more stable payback periods, like infrastructure projects and factory construction that will take advantage of long-term growth.

Standard & Poor’s Managing Director and Indian Regional Head Ravi Mohan summed up the scenario on Monday: “Investment sentiments of FIIs will depend on the policy measures from the central and state governments. On the FDI side, I don’t expect any slow down as the capital demand is very high in different sectors.”

Public-private partnerships (PPP), which put FDI money together with the state’s investment capital, will be important over the next few years. In fact, roads and other infrastructure are the main factors separating India from China these days.

India’s status as an English-speaking high-tech hotbed hasn’t driven the larger economy as much as it could because clogged streets and convoluted customs processing slows down the flow of goods and money. Infrastructure may even be as big of a long-term challenge as national security, and that’s a way of thinking that is now coming to Washington as well as the Indian capital New Delhi. International infrastructure stocks will benefit in that shifting paradigm.

As for the direct effects of the Mumbai attacks, tourism and hospitality-related industries will almost certainly suffer…

But it’s important to keep in mind that India had witnessed terror attacks before this, and the country’s draw as an ancient cultural center and developing country persisted. India won’t grind to a halt in fear, and neither will Indian investments.

Goldman Sachs (GS) is forecasting Indian domestic growth slowing to 6.7% in 2008 and 5.8% in 2009. Compare that to Goldman’s most recent U.S. GDP estimate of a 5% drop in the current quarter, and Indian investments are still very attractive over the long term.

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