Adani countered the Hindenburg but India’s emerging market star status has waned

The start of 2023 is intended to be in India. The rapid growth of the country’s economy and the rapid expansion of equity markets have convinced money managers from Morgan Stanley Investment Management on State Street Global Advisors calls it a top investment destination.

Then came the $50 billion selloff of billionaire corporate empire Gautam Adani.

It was a shock that forced Wall Street to reassess its confidence in India’s expansion and its pro-business government, which helped the benchmark Sensex index trade last quarter to its highest in a decade compared to the S&P 500. Those already high valuations — combined with a painful New York short-sellers report attacking the Adani Group — highlights the contradictions within India’s runway for growth.

“India needs to show that its institutions are strong,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management, which owns equities in the country as part of its overweight portfolio. developing market position. “Management issues are a concern for all markets. But when valuations are higher than in other countries, maintaining the integrity of financial markets is important.”

Investors are increasingly drawn to the narrative of the Indian assets opportunity. As bonds slowly entered benchmark indices around the world, a flurry of companies rushed to sell shares, increasing the size of the country’s emerging stock market.

Indian stocks now account for more than 14% of MSCI’s emerging-market equities index, trailing only China, after it surpassed the weight of Taiwan and South Korea last year. Morgan Stanley predicts that India’s equity market is set to become the third largest in the world before the end of the decade.

Read more: Morgan Stanley IM Says Decade of Emerging Markets Has Begun

But such optimism has led shares in the Sensex index to trade at around 21 times their forecast earnings, a metric that shows investors are willing to pay a premium in the hope of stronger growth. Amid such high valuations, the Sensex index headed for a second straight monthly loss even as broader emerging equities rallied.

Adani’s accountant

A 100-page report by short seller Hindenburg Research last week covered allegations of stock manipulation and accounting fraud by Adani entities added further fuel to the sale.

Hindenburg released its report just days before the billionaire’s flagship company Adani Enterprises Ltd. India’s largest initial public offering seeks to raise 200 billion rupees ($2.5 billion).

In a 413-page objection published on Sunday, the Adani Group said Hindenburg’s conduct was “nothing short of calculated securities fraud,” and said the research firm was attacking India as a whole.

Read more: Adani Says Hindenburg’s Conduct Was ‘Calculated Securities Fraud’

For some, including Hasnain Malik, a strategist at Tellimer in Dubai, “bad behavior of a company, if proven to be the case, usually does not lose confidence in the entire equity market.”

However, the collapse of one of India’s biggest businesses could be what holds the country back as it competes against China as an investment magnet.

Cheaper alternatives

Indian stocks will be vulnerable to portfolio shifts as investors reduce their exposure to expensive assets and instead bet on the opening of China’s economy to its beneficiaries, such as Taiwan and South Korea, Jon said. Harrison, managing director for emerging-market macro strategy at TS Lombard in London.

Carrhae Capital LLP, whose emerging-market hedge fund beat peers last year, too preferred to bet on the reopening of China. The manager will only look for a bargain in India’s “structural growth” stories if “investors rush out of India to chase the China story,” said Ali Akay, the London-based chief investment officer.

“I personally don’t think the structural story of India has changed much,” Akay said. “The growing perception of China as a strategic competitor rather than a partner has enabled India to assume the mantle of regional bulwark against China that the West needs to build and expand.”

In an environment of heightened geopolitical risk – with growing rivalry between the US and China and Beijing’s increasing pressure on Taiwan – India provides a level of “security,” said Gaurav Mallik, chief which is a strategic investment by State Street Global Advisors. The money manager has an overweight position in India, attracted by a growing middle class that is “good for consumption plays,” he said.

Mark Mobius, who spent more than three decades at Franklin Templeton Investments, plans to put more money into India, which may have already surpassed China as the world’s most populous country. A young and growing workforce can improve productivity if investment in education and infrastructure is sustained.

“The long-term future of the market is huge,” said the co-founder of Mobius Capital Partners LLP, which counts India as one of its main allocations.

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