It’s thus likely that the Indian government will continue as an ever-increasing drag on the economy, with a funding crisis possible if public spending increases too much.
In such an environment, it is unlikely that India’s 8% average growth rate of the last five years can continue; the average of the next five years is much more likely to be in the 4% to 5% range, possibly with an acute foreign exchange crisis at some point. There’s no question that India’s stock market - trading at a Price/Earnings (P/E) ratio of roughly 20 - is expecting much better than this. That means it’s time to step back.
When - and How - to Make Your Play
Once the euphoria has dissipated, and the Indian market has dropped at least 30% from its current level, to below 10,000 on the Bombay Stock Exchange’s Sensex Index, Indian shares will once again be worth looking at, if only because of the country’s immense long-term-growth potential - an upside great enough to overcome even the immense drag of most of its governmental shortcomings.
At that point, the heavy capital investors such as Tata Motors should be avoided, because of the unpredictability of capital availability in a capital market whose savings can be sucked into the government’s immense maw. Look instead at such non-capital-intensive exporters (the exchange rate is likely to remain relatively weak) as the software company Infosys Technologies Ltd. (Nasdaq ADR: INFY), or global pharmaceuticals producer Dr. Reddy’s Laboratories Ltd. (NYSE ADR: RDY).
Both stocks are currently somewhat expensive, with Infosys trading at about 18 times the consensus analyst estimate for forward earnings, and Dr. Reddy’s roughly 14 times. But both stocks should be purchased for long-term growth during periods when investor enthusiasm for the Indian market has had a chance to cool down.
