India’s cricketers have had the worst possible start to the year. India’s stock market, on the other hand, is having a belter, up 11 per cent in one month and recovering two-fifths of the value lost in last year’s rout. From being in the bottom quartile of 91 world indices by returns in 2011 it is now playing into the top 10 in the year to date. But steady on; India’s outlook hardly merits such a dramatic re-rating.India bulls talk a good long-term game. Rapidly growing middle classes boost consumer-oriented companies while India’s need to overhaul its infrastructure will support heavier industries. Momentum is growing, too: gross domestic product took five years to double to $1tn in 2006, and should have doubled again to $2tn by the end of this year.
And yet. The reasons for last year’s dismal performance linger, namely still persistent inflation (9 per cent) and correspondingly high interest rates (8.5 per cent). Price pressures seem to have peaked but their rate of decline, and the speed of expected interest rate cuts, are uncertain. Then there is the politics; paralysis in New Delhi was a key factor in investor disappointment last year. Early reforms this year – greater direct foreign access to stocks, or allowing foreign retailers to own stores outright, for example – are welcome but not enough. There are a series of state elections – Uttar Pradesh, in particular – in the next three months. Only after both of these and the subsequent national budget presentation will it become clear whether Manmohan Singh’s reform-minded coalition government can actually deliver.
Stocks, based on forward earnings, do not look expensive. India’s 15 times multiple is below its five-year average of 18. But the same applies to Brazil, at 10 and 12, and China at 9 and 14, according to Espirito Santo Investment Bank. January’s rally has revised the overdone gloom of late last year (2011 laggards such as property and banks are the best performers) but it does not justify fresh optimism. Wait for the politics to clear first.