Foreign investors ignore 'gloom and doom' theories, buy Indian shares

Sep 06 2013, 10:31 IST
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Hand-wringing over the state of the economy today masks the long-term compelling play that attracted many foreign investors to India in the first place. Hand-wringing over the state of the economy today masks the long-term compelling play that attracted many foreign investors to India in the first place.
SummaryDarkest before dawn: investors are not only ignoring the warnings, they are buying more shares.

Newspaper headlines spew doom and gloom about India. Analysts are topping each other with ever-more-dire pronouncements on the country's prospects. And yet some foreign investors are not only ignoring the warnings, they are buying more shares.

It flies in the face of conventional wisdom to bet on a country with a currency tumbling to record lows and a government that is clutching at straws to deal with India's worst economic turmoil since its balance of payment crisis in 1991.

Yet to some financial firms such as Ashmore Group in London the panic gripping India ignores an economy that, although slowing sharply, is far from collapse.

So much hand-wringing over the state of the economy today masks the long-term compelling play that attracted many foreign investors to India in the first place, including a young, urbanising population that will drive consumer demand and an economy that is increasingly diversifying into exports.

"The market is obviously currently gripped in a sense of panic and, as such, it is not paying a lot of attention to the underlying fundamentals," said Jan Dehn, head of research at Ashmore Group in London, which manages $80 billion worldwide.

"What happens in these situations is that where the market has gone and what actually exists on the ground in reality have parted ways with each other."

The case against India is not hard to make.

Investment has melted away and data is pointing to a plunge in manufacturing and service-sector output. At the same time, the current account deficit is at a record high, a stubborn fiscal deficit has raised the risk of sovereign rating downgrades, and the RBI's recent cash-draining steps threaten to raise borrowing costs across the economy.

Some analysts say India's bond market is pointing to the risk of recession. Banks from HSBC to Goldman Sachs have cut their economic growth forecasts for India in fiscal 2013/14 (April-March) to below the already decade-low of 5 per cent in the previous year.

IS IT REALLY A CRISIS?

Yet some investors believe the pessimism is overdone.

Even if growth were to slow below 5 per cent, that would still be a faster clip than some other one-time darlings of foreign investors, including South Africa and Brazil, which are both expected to grow at around 2 per cent.

Analysts also point to growing indications that the rupee has overshot, especially after new Reserve Bank of India (RBI) Governor Raghuram Rajan sparked hopes that recent controversial measures will be unwound.

The

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