India Has Serious Problems
I have never been as big a fan of Indian stocks and the country's economy as I am of China's. I have really only owned stock in one company from the country, HDFC Bank (HDB) and I sold it a long time ago.
Even though the Indian stock market fell more than 55% in 2008, I wasn't surprised in the least when Barron's published a bearish article on the country in this week's issue, Why India Won't Rebound Soon.
The piece makes a persuasive argument for why despite already falling 55% from its high the Indian stock market won't rebound in the near future. In short, it was and still is overvalued.
- India's forward P/E is 60% higher than that of emerging markets as a group.
- India's price-to-book ratio is 72% higher than that of emerging markets as a group.
- The Sensex's 2% dividend yield is much lower than that of other emerging markets, which typically are at around 5%.
While there is obviously a lot to like about India, the Indian stock market had gotten way ahead of itself. Just a year ago in January 2008 the market cap of Indian stocks had soared to 180% of the country's GDP. In comparison, the market cap / GDP ratio for the U.S. market at the top of the dot com bubble was only 131% and the ratio at the peak of the Japanese market years ago was only 150%.
Many analysts believe that the Indian stock market will retest its recent lows at some point in the next fifteen months before it begins any sort of new bull run.
Certain analysts who were interviewed for the article were bearish on India's currency as well. The country's current-account deficit and its debt repayments amount to 18% of its foreign-exchange reserves. The rupee has already fallen by more than 20% this year versus the U.S. dollar (though much of that can probably be attributed to irrational dollar strength than anything). In any event, a weaker rupee leaves Indian companies that have borrowed money abroad vulnerable. Having said this, I personally am less worried about weakness in the rupee because I think that the recent dollar strength is nuts.
As if India didn't have enough problems already, this piece of terrible news just came out this morning: Satyam chief quits, fraud scandal hammers shares.
The head of Indian outsourcing firm Satyam (SAY) resigned this morning after admitting to falsely inflating the company's profits over the past several years. Talk about some cooking of the books, supposedly about $1 billion or 94% of the cash that has on the company's books is fictitious.
They're calling this the Indian Enron. The news is so big that it dragged down the entire Indian stock market by a whopping 7.3%. Ouch. Analysts are now questioning entire corporate governance system. Here's a quote from R.K. Gupta, managing director at Taurus Asset Management in New Delhi (not to be confused with the possible new U.S. Surgeon General :)) "If a company's chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India."
Ironically, only three short months ago Satyam received a "Golden Peacock" award from a group of Indian directors for excellence in corporate governance. Perhaps they should have received the "Golden Turkey" or "Golden File Baked Into a Cake" award. Sheesh.
Unfortunately, this is yet another blow for India's stock market, which was already headed in the wrong direction.
The coveted Golden Peacock
Thankfully no position in SAY