Indian Stock Market Set to Climb in 2014

MUMBAI — Indian stocks reached record highs in 2013, but most international investors still lost money here as the rupee’s weakness erased returns.

This year could be better, analysts and investors said, depending on whether pro-business politicians get more power in forthcoming national elections.

While the Indian benchmark, S&P BSE Sensex Index rose around 9% in 2013, touching an all-time high in early December, the MSCI India index, a widely followed measure of Indian stocks bought by global investors, lost close to 6% in dollar terms because of the rupee’s collapse.

Among major Asian stock markets, India was one of the worst performers last year in dollar terms, behind MSCI Thailand Index’s 17% loss and MSCI Indonesia’s 25% loss. The U.S.’s benchmark S&P 500 index gained close to 30%.

Indian equities have had “a massive relative underperformance in dollars,” said Tim Love, London-based head of emerging-market equity at asset-management firm GAM, which manages $62 billion. “It is more about the currency than it is about the stock market.”

The Indian rupee plunged more than 20% between May and August to an all-time low against the dollar due to fear that India would struggle when the U.S. rolled back its easy-money policies. It has regained some ground, but was trading 11% weaker on the last day of 2013 than at the end of 2012.

India-dedicated mutual funds available to U.S. investors lost close to 12% on average in 2013, according to research firm Morningstar Inc. The HSBC Global Investment Funds Indian Equity fund, one of the largest India-dedicated offshore funds with $2.5 billion in assets, lost around 15%.

Despite the dollar losses, foreign funds have been buying in recent months. Some are optimistic India will get a pro-business government in federal elections due before the end of May. Foreign institutional investors have poured a net $8.5 billion into Indian equities since the beginning of September. This reversed a net outflow of $3.8 billion between June and August.

Any further stock-market gains, however, will be tempered next year as decision makers focus on elections and put off dealing with the many problems that have cut India’s gross domestic product growth in half in recent quarters. The Indian economy is expected to record decade-low annual growth of less than 5% in the year ending March 31.

Inflation has been rising and the central bank has been raising interest rates to curb it. Higher rates and delays in government approvals of new projects have persuaded many companies to put off expansion.

“The stress in the economy isn’t reflected in the equity” prices yet, said Anoop Bhaskar, head of equity at UTI Asset Management Co., a Mumbai firm that manages around $11.3 billion.

Many investors blame the Congress-led government for stalling the economy and delaying an economic overhaul. While they hope this will change if Narendra Modi—chief minister of the affluent state of Gujarat and the prime ministerial candidate of the Bharatiya Janata Party, India’s main opposition group—comes to power in the national elections, it wouldn’t be until late in the year that new, growth-boosting policies could be put in place.

There is also a possibility that India could get a coalition government too divided to pass unpopular changes. Some investors want more political certainty before they invest in India.

“I’d wait and see what they’d actually do,” said Khaled Louhichi, emerging-market analyst at Swiss bank Union Bancaire Privée, which manages $85 billion.


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