Indian elephant offers the investor steady success

ANALYSTS comparing the prospects for the world’s two most populous countries often evoke an Asian

version of Aesop’s famous fable of the tortoise and the hare – the elephant and the tiger. The elephant makes slow and steady progress to reach its goal while the tiger bounds forward more quickly and more powerfully, but risks tiring more quickly. It’s not hard to guess which animal is India and which is China.

Further evidence of India’s solid economic performance came yesterday in the form of second quarter GDP figures – its $1.3 trillion economy expanded by 8.8 per cent in the three months to June, the fastest pace of growth in two and a half years, and roughly in line with the market’s expectations.

China often steals the limelight from India but with worries about a tiring Chinese tiger, does India offer a compelling investment case? Guido Stiel, portfolio manager of the Allianz RCM Bric Stars fund, says that India represents a good long-term opportunity not only because of its infrastructure needs, but also because of its growing middle class. This means consumer products and financial services companies offer huge potential.

But what of India’s performance compared to its neighbour? Since December last year, the elephant has done better than the weary tiger, at least in terms of its stock market (see chart). Can India sustain this or is China about to bound forward?

John Millar, manager of the Martin Currie Pacific Trust, says that in many ways India is a better opportunity than China: “The Indian growth story is at an earlier stage than the corresponding story in China, which is now more mature. We also feel that the management of Indian companies is generally better; this is not a universal view, but we feel that they have had to contend with a much tougher environment than their Chinese peers.”

But while hefty foreign inflows have boosted the Indian stock market, the one stumbling block for both Millar and Stiel is market valuation. Stiel sees the 2011 price-to-earnings (p/e) ratio for Indian equities to be about 13-14 times with earnings growth of 20-21 per cent compared to a p/e of 10 times for the Hang Seng and earnings growth of 18 per cent. Martin Currie research shows Indian stocks are trading on a price-to-book ratio of three times compared to 2.1 times for Asia as a whole.

Expensive valuations mean fund managers are slightly more positive on China than India in the short to medium-term, but the case for both is compelling in the long-term. Those after exposure should choose a regional or Bric fund – after all, why stake your money on the elephant or the tiger, when you could bet on both?