<p>It is only in the past few years that India has come onto the radar-screen of most global investors.<br/>Result: many funds, including specialist Asian funds, remain structurally underweight.<br/>While the short-term outlook is difficult, as the market struggles to cope with rising inflation, pricey<br/>crude oil and slowing growth, it reflects only a cyclical downturn. In our view, the structural story<br/>remains compelling.<br/>This report aims to provide an introduction to the Indian equity market for new investors and indepth<br/>insights into the market dynamics for experienced fund managers. It argues that Indian<br/>stocks, from a long-term perspective, remain one of the most exciting investment stories around.</p><p>The performance of Indian markets was one of the surprises of the last global equity market boom, and<br/>put India on the radar-screen of global investors. As such, despite the recent mood of despondency among<br/>investors, especially foreign investors, we remain optimistic and believe that the current weakness reflects<br/>a cyclical downturn. The long-term structural story, however, remains exciting, and there are strong<br/>reasons to invest in India, as evident from the points below.<br/>􀀗 The Indian economy is led by rising consumption and a high investment rate. According to<br/>Mckinsey, the middle class in India will expand from about 50 million to 300 million by 2025<br/>leading to a boom in consumption<br/>􀀗 A high rate of investment totalling 38% of GDP, supported by a high savings rate of 37% of GDP,<br/>has been the main driver of GDP growth in the last five years<br/>􀀗 India is reaping the benefits of economic reforms launched in 1991 and is currently the second fastest<br/>growing economy in the world<br/>􀀗 India’s financial depth has improved significantly, with market capitalisation rising from c33% of<br/>GDP 10 years back to c100% of GDP now, making it the twelfth largest equity market in the world.<br/>Opening up of the asset management and life insurance industries to the private sector and allowing<br/>foreign institutions to invest in Indian equities has created a more diversified and sophisticated<br/>investor base<br/>􀀗 The volatility in Indian markets has fallen and risk premiums have become significantly lower as a<br/>consequence of the recent positive economic developments. This has driven the re-rating of Indian<br/>markets. The current market is well diversified in terms of representation of sectors and the volatility<br/>of earnings is low – both of which lower risk<br/>In this report, we analyse the earnings history of companies since 1991, and the trend in relation to ROE, ROA,<br/>margins and growth. We also summarise the ownership structure of Indian companies and the changing<br/>composition of Indian equity markets in terms of sector representation. In line with growth in services, sectors<br/>such as IT and telecom have gained more importance in equity markets.<br/>We also analyse the driver of returns in equity markets. Since the beginning of economic liberalisation in the<br/>early 1990s, EPS growth has accounted for 73% of returns, while the balance has been from the re-rating of<br/>markets. Our analysis suggests that the trend rate of real returns has been 7% in local currency terms.<br/>The major risks for equity markets emerge from a slow pace of economic reforms, as well as other economic<br/>risks such as lagging investment in infrastructure, education, monetary policy and a high fiscal deficit. We<br/>believe that India will be a bear market in the short term, the fourth since liberalisation. The major risks in the</p><p>short term will be rising inflation, slowing growth, margin pressure on corporates on account of increasing<br/>commodity prices (especially crude oil), further rise in interest rates on account of monetary tightening, and a<br/>rise in political uncertainty. Of these, the price of crude is likely to weigh more heavily on markets.<br/>There are two ways of investing in a bear market – by buying on dips and selling on rallies and by buying<br/>stocks with strong fundamentals for the long term. India seems ideally placed to reward investors who<br/>adopt the latter strategy.</p><p>目录</p><p>Strong economic<br/>fundamentals 4<br/>Growth stock 9<br/>What drives the market? 11<br/>Earnings 14<br/>Equity returns in India 20<br/>Valuation and COE 27<br/>Trading 37<br/>Market composition 43<br/>Ownership of the market 52<br/>Disclosure appendix 97<br/>Disclaimer 99</p><p></p><p> <br/></p><p></p>