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India’s valuations are cheaper: Analysts

This article was posted on Jun 12, 2009 and is filed under Press Releases

HONG KONG/MUMBAI: While investors hope that consumer spending growth in China will eventually balance its export dependence, in the short term it is India that presents more opportunity.

Economists crow over the long-term domestic growth prospects in both emerging Asian giants, which is likely to be led by a young generation of spenders eager to buy clothes, computers, cars and other goods.

Until recently, China’s massive government stimulus spending worth 6 per cent of gross domestic product was the biggest draw in Asia for investors chasing growth.

However, last month’s stunning election victory by India’s Congress-led coalition, which allowed the grouping to secure a parliamentary majority, has turned the heads of some fund managers to the consumer-oriented sectors in India.

In addition, India’s valuations are cheaper, suggesting more upside potential for any investments.

“For the first time in 12 years, I am more confident of India than China because India has made good macro improvements,” said Stephen Roach, chairman of Morgan Stanley Asia, while in Mumbai. “It has well managed companies, entrepreneurial talent, English-speaking population, well developed capital markets and now the political will to reform,” he said.

Investors have had every reason to look at India’s consumer market anyhow. The median age in the billion-plus population is 25 years and private-sector consumption makes up about 60 per cent of economic activity.

Consulting group AT Kearney says the sector will grow 63 per cent between 2008 and 2013 to become a $833 billion market.

By comparison, the median age in China’s billion-plus population is slightly older, at 30 years, and the private sector makes up a smaller part of the economy at around 40 per cent.

“Changes in consumption patterns in China will occur gradually. It won’t happen overnight. Indian consumers have shown themselves willing to spend more of their income, and changes in the government will act as a catalyst more immediately in the next 12 months,” said Robert Tucker, investment director of Asian equities at Halbis, a unit of HSBC Global Asset Management in Hong Kong.

Since Beijing announced spending of 4 trillion yuan ($588 billion) in November to support its economy, portfolio flows have chased China’s domestic growth story.

But India’s election results in mid May have added to the consumer appeal of the country because the ruling coalition’s strong position is expected to translate into a slew of incremental reforms.

Such reforms are expected to relax foreign direct investment limits for single and multi-brand companies in the retail sector, Credit Suisse analysts said in a research note.

The impact would be high because the retail sector is fragmented and dominated by small, independently-owned stores.

So any chains, which make up just 5 per cent of stores, would be prime investment targets, such as Pantaloon, Shopper’s Stop Ltd, Vishal Retail Ltd and Koutons, but the likelihood of it happening in the next 12 months is low.


China’s valuations in the consumer discretionary sector have risen more rapidly than India’s, all the more reason why asset managers have been sifting through Indian markets in search of value.

At the beginning of the year, 12-month forward price-to-earning multiples were higher in India at 9.0 times compared with 7.81 times in China, figures from global estimates tracker I/B/E/S show.

Now they are 13.95 times in India and 15.32 times in China. Not only are India’s consumer discretionary stocks cheaper than China’s, the broad market is outperforming as well.

Ninety-day rolling total returns of the FTSE index for India are 74 per cent, compared with China’s 57 per cent and Hong Kong’s 45 per cent.

On March 9, when a global equity rally began, 90-day total returns for the FTSE India showed a loss of 13 per cent. They were flat for Hong Kong and were up 20 per cent for China.
Within India, retailers Pantaloon and Shopper’s Stop have outperformed the main Bombay stock index by a wide margin in the last 90 days by more
than doubling their returns compared with the index’s 78 per cent.

“Going by our bottom-up investment strategy, China has attracted a little more interest in the first half. So India may see higher allocation in the second half of the year,” said Mark Konyn, who overseas about $11 billion as the Asia-Pacific chief executive with RCM, a unit of Allianz Global Investors.

Few investors doubt that Chinese consumers will continue to take advantage of government incentives and buy big-ticket items, like new vehicles. Car sales in May were 829,100, just short of April’s record 831,000.

However, economists believe the lack of an institutionalised social insurance system will keep precautionary saving levels high in China, especially so at this time of economic uncertainty and rising job losses.

“The welfare system in China is still very weak so even rich people have to make precautionary savings,” said Grace Tam, vice president of investment services at JPMorgan Asset Management in Hong Kong.

“Government measures, like increasing the medical insurance coverage, will not change things immediately but they are steps in the right direction to unlock domestic consumption,” she said.

Tam added that India has some catch up to do in terms of infrastructure investment, which will speed up the process of migration to cities.

Marco Giubin, senior portfolio manager for Mirae Asset’s Asia Pacific consumer equity portfolios, said he expects the Indian government to push through some infrastructure projects with its election mandate, and improved business confidence should stimulate credit flow there.

Yet, he said the best way to differentiate Asian portfolios at this stage is by pricing power.

“The strength in the demand profile is already well known to a lot of multinational companies, so it’s more about the areas where we see players that get pricing power from their brand or distribution network,” he said.

“Consumers are willing to pay a premium for the brand they like.”

source: Economictimes

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