>New Stock Market Story (WHARTON)

India's New Stock Market Story and Its 'Next Trillion Dollar Opportunity'.

If there's one thing Raamdeo Agrawal has learned over 22 years as an investor, it's that the stock markets "always come up with a story every four or five years." Soya processing and leasing companies caught the Indian stock markets' imagination in the early 1990s. Then came the Y2K rush and the dot-com boom in the late 1990s, followed by yet another binge on IT software stocks, he recalled.

Agrawal, co-founder of Motilal Oswal Securities, an investment services firm in Mumbai, made money by investing in all those boom phases, even if he didn't initially understand "the difference between hardware and software." At the 13th Wharton India Economic Forum in Philadelphia in March, he participated in a panel discussion on "Rational Exuberance in the Indian Capital Markets."

Agrawal was more bullish about the outlook for the Indian capital markets than his fellow panelists. Seth Freeman, CEO and chief investment officer at EM Capital Management of San Francisco, a hedge fund that invests in India, among other markets, is also a long-term bull on India. But Sandeep Naik, principal at Apax Partners India Advisers, a private equity fund with global headquarters in London, noted he was worried about capital formation trends and India's ability to sustain a targeted GDP growth rate of 7% to 8.5%.

Senthil Chengalvarayan, president and group editorial director, business media, at Television 18 in India and the discussion's moderator, pointed out that share values in the Indian stock markets are trading at between nine and 11 times earnings these days, compared with 22 times a year ago. "When do you see the market turning?" Chengalvarayan asked, noting the coming Indian general elections and the fact that foreign investors have taken a double whammy in seeing both their Indian investments and the rupee lose value. "Foreign investors have pulled out about US$16 billion in the last 17 months from India," and it's
unclear whether that trend will continue, he said.

A Hedging Opportunity

Time was when global investors looked at developing markets like India to hedge some of their investments. "That myth has clearly been shattered," Naik said, referring to the erosion in stock values over the past year. He noted some key factors that contributed to that trend: "huge redemptions" by foreign institutional investors causing a net outflow of US$15 billion last year (compared with a net inflow of US$17.4 billion in 2007); a 25% drop in domestic equity issuance; and a 95% drop in foreign issues by Indian companies.

India needs to build upon its recent successes to sustain its growth story, according to Naik. He listed its accomplishments in recent years: household savings have climbed to between 23% and 24% of GDP and stayed at that level; corporate savings have doubled from 4% to 8%; the government's savings rate has moved from negative territory to reach 3% of GDP; and foreign institutional investments have grown 40% in the past six years to account for 6% of GDP.

To see full report: NEW STOCK MARKET STORY