Adani v Hindenburg but India’s emerging market star status is fading
The start of 2023 was supposed to be the Indies. The country’s fast-growing economy and rapidly expanding stock markets convinced fund managers toMorgan Stanley Investment Managementto State Street Global Advisors for calling it a premier investment destination.
Then came the $50 billion sale in the corporate empire of billionaire Gautam Adanis.
It’s a shock that forces Wall Street to re-examine its confidence in India’s expansion and its business-friendly government, which helped the benchmark Sensex index to trade in the last quarter at its highest since a decade against the S&P 500. These already lofty valuations combined with a scathing New York short-sellerA report attacking the Adani Group highlights the contradictions within India’s growth track.
India needs to show that its institutions are strong, said Rajeev De Mello, global macro portfolio manager at GAMA Asset Management, which holds domestic equities as part of its overweight position in emerging markets. Governance issues are a concern for all markets. But when valuations are higher than in other countries, maintaining the integrity of financial markets is essential.
Investors have been increasingly drawn to the narrative of opportunity in Indian assets. As bonds slowly made their way into global benchmarks, a slew of companies rushed to sell stocks, increasing the size of the country’s booming stock market.
Indian stocks now make up more than 14% of the MSCI Emerging Markets Equity Index, behind only China, after topping the weights of Taiwan and South Korea last year. Morgan Stanley predicts that India’s stock market should be the third largest in the world before the end of the decade.
Read more: Morgan Stanley IM Says Emerging Markets Decade Has Begun
But such optimism is what has led shares in the Sensex index to trade at around 21 times their expected earnings, a metric that shows investors are willing to pay a premium on the prospect of stronger growth. Amid such high valuations, the Sensex index is heading for a second month of losses even as emerging stocks rally more broadly.
Short seller Hindenburg Research’s 100-page report last week containingallegationsinventory manipulation and accounting fraud by Adani entities added more fuel to the sale.
Hindenburg released its report just days before billionaire flagship Adani Enterprises Ltd. is launching India’s largest-ever primary follow-on public offering, which is seeking to raise 200 billion rupees ($2.5 billion).
In a413-page rebuttalpublished on Sunday, Adani Group said Hindenburg’s conduct was nothing short of a calculated securities fraud and said the research firm was attacking India as a whole.
Read more:Adani says Hindenburg’s conduct is calculated securities fraud
For some, including Hasnain Malik, a strategist at Tellimer in Dubai, bad corporate behavior, if it turns out to be the case in this case, usually does not derail confidence in the broader stock market.
Even so, the fall of one of India’s most sprawling companies could be what is holding the nation back as it competes with China as an investment magnet.
Indian stocks will be vulnerable to portfolio shifts as investors reduce their exposure to expensive assets and instead bet on China’s economic reopening to its beneficiaries, such as Taiwan and South Korea, said Jon Harrison, chief executive of the macro emerging markets strategy at TS Lombard in London.
Carrhae Capital LLP, whose emerging markets hedge fund beat its peers last year, alsofavoritebet on the reopening of China. The manager will only seek bargains in Indian structural growth stories if investors rush out of India to chase the China story, said Ali Akay, the firm’s London-based chief investment officer.
Personally, I don’t think the structural history in India has changed much, Akay said. The growing perception of China as a strategic competitor rather than a partner has enabled India to take on the role of a regional bulwark against China with which the West must build and further integrate.
In an environment of heightened geopolitical risk with the growing rivalry between the United States and China and growing pressure from Beijing on Taiwan, India offers a degree of security, said Gaurav Mallik, chief investment strategist at State. Street Global Advisors. The portfolio manager has an overweight position in India, attracted by a growing middle class that bodes well for consumer gaming, he said.
Mark Mobius, who spent more than three decades at Franklin Templeton Investments, plans to invest more money in India, which may have already overtaken China as the world’s most populous nation. A young and growing workforce could boost productivity if investments in education and infrastructure could follow.
The long-term future of the market is excellent, said the co-founder of Mobius Capital Partners LLP, which has India among its top allocations.
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