Time to Buy Asia’s Worst Performing Stock Market?

India’s central bank surprised the markets on Tuesday, lifting interest rates by 50 basis points to 8 percent. The move marks India’s 11th rate hike since March 2010, as the Reserve Bank battles persistent inflation, which accelerated to 9.4 percent year-over-year in June.

An Indian stock broker watches his computer screen at brokerage company at the Mumbai Stock Exchange.
Indranil Mukherjee | AFP | Getty Images
An Indian stock broker watches his computer screen at brokerage company at the Mumbai Stock Exchange.

But some analysts believe that India’s tightening cycle is near an end and the country’s equity market, which is the worst performer in the Asian region this year, presents a good buying opportunity.

“In the last year or so, we’ve been underweight India because inflation numbers have raised significantly, even more than countries like China,” says Aadil Ebrahim, Managing Director at Bowen Capital Management. “We believe Indian inflation numbers have peaked. And that’s normally a good time to start making some investments.”

Ebrahim is betting on companies such as Bajaj Auto, and recently added exposure to luxury watch and jewelry retailer Titan Industries, as well as Redington, a distributor of technology products such as mobile phones and computer monitors.

Clay Carter, Head of International Equities at Perennial Investment Partners says he usually invests in the mid-cap space, but recently broadened his portfolio to include larger companies such as engineering construction firm Larsen and Toubro and HDFC Bank.

“We're a bit more comfortable with India compared to China. We think it's more transparent. We know what the RBI is up to, whereas Beijing’s various pronouncements just come out of the left field. That's difficult for investors to be quite honest,” he says.

Despite its poor performance, India remains one of the most expensive equity markets in the region. The Sensex trades at a forward price-to-earnings (P/E) ratio of 15, higher than the Shanghai Composite’s 12 times.

In a recent report, Citigroup argued that India’s premium is justified because of high returns on equity enjoyed by Indian stocks and robust earnings growth.

Citi maintains its positive outlook for India, and says the Sensex could rise as much as 16 percent to 21,500 by year-end.

But not everyone is a fan of Indian stocks. Mark Matthews, Head of Research Asia at Bank Julius Baer prefers to stay away from the market due to India’s high inflation, lack of reforms and corruption.

“Since the 2G telecom scandal erupted last year, there's been total inertia in policies. There are still many issues that the government has failed to address. Sure, there are interesting stocks in India that have fallen a lot and are long-term buys. But for the market as a whole I see no need to overweight at this point,” he says.