Indian stocks — is the gloom about to lift?

March 10, 2011

INDIA-ECONOMY/BUDGETIs the gloom finally starting to lift  for Indian stocks? Deep in the red this year, the market has nevertheless risen 3 percent in March. That’s despite oil’s surge over $100 a barrel. So what gives?

On the face of it, it’s a terrible time for the Indian market. Soaring oil prices, near double-digit inflation and a hawkish central bank  — all this will almost certainly ensure that India misses its 9 percent growth target for the coming fiscal year.  But the Mumbai market fell 15 percent in the first two months of 2011 and that means valuations in India, always an expensive market, may be approaching reasonable levels.   “A sharp rise in oil is always a tail risk for India but given equity valuations, we think it is a good time for stock picking with a 12-month view,” Morgan Stanley analysts told clients in a note.

And oil does not necessarily spoil the party, Morgan Stanley says. MS analysts note that of the six oil supply shocks over the past three decades, only the 1990 Iraq war left Indian equities in the red six months after the shock. That was due to a balance of payments crisis which is not likely this time. So, excluding the 1990 event, the Sensex index has risen 24 percent on average in the six months after an oil shock, MS says.

Well then, is it time to start buying? Most are still cautious, citing valuations, as well as oil. Some like John-Paul Smith, Deutsche’s chief emerging equity strategist, say they will stay neutral for now. Smith says India will start to look attractive when prices fall to two times book value — it is currently at 2.2 times book.   But he still sees oil as key, adding: “If the oil price falls, the two standout beneficiaries in emerging markets will be India and Turkey.”

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