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India's Stock Market: The Bull Case
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Tuesday, 24 July 2007
India bulls remain resolutely upbeat, arguing that earnings at Indian companies are sustainable. They are quick to point out that the market's high P/E rating is due to its domination by IT services and capital goods -- sectors that are characterized by unusually high P/Es.
IT services -- dominated by names such as Infosys Technologies, Wipro and Tata Consultancy -- outsourcing giants that have benefited from the shifting of white-collar jobs from higher-wage Western economies -- typically trade at about 25 times earnings. And with order books full for the next four years, the capital goods groups sector is cheap when viewed through the lens of the all important PEG (price earnings to growth) ratio. And relative to their growth rates, India's banks are among probably the cheapest in Asia. Finally, ONGC, the oil and natural gas group, is among the cheapest in the world based on a barrel of reserves.

India also has other factors going for it. With one out of four of the world's under 25s in the world living in India, its demographic profile is unusually strong. And unlike some of the Asian Tigers which collapsed a decade ago, India is much less dependent on foreign trade than its traditional Asian counterparts.

And what about currency strength? Bulls see only benefits. After all, rupee appreciation makes all-important dollar-denominated commodities much cheaper. Traditional industries like textiles may find it harder going, but IT outsourcing or gems and jewelry -- surprisingly India's biggest export sector by value -- all benefit from India's stronger currency.

Bulls view ever present political risk as a red herring. They point out that every time the market has fallen because of supposedly adverse political developments, it turned out to be a terrific buying opportunity. (That rule of thumb seems to apply to most emerging markets.)
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And while many emerging markets are dependent on foreign investors, bulls feel that a wall of domestic institutional money will flow into Indian equities. The life insurance sector is growing at 60% a year and the pension fund industry is now investing in equities for the first time. This will help provide the Indian market with a more stable investor base.
Source : Global Bull Market
 

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