India is booming. Will it blow up in your face?

In this issue:

• India’s stock market boom: marvel or mirage? 
• The risk-free lunch for retirees is coming to an end

Good morning, BT readers. 

India is having a moment. The country’s benchmark index is headed for a ninth straight annual gain, and its initial public offering (IPO) scene is punching way above its weight class. 

Heavyweight listings have abounded this year, with Hyundai Motor India raising a record US$3.3 billion in the market’s biggest-ever IPO, while telco operator Bharti Hexacom’s shares jumped 43 per cent on its debut.

“Eight of Asia’s 20 most dramatic trading debuts this year have been in India,” a Fidelity International research piece said in June. Many of the IPOs had a retail portion that was oversubscribed by more than 100 times, it noted.

Even so, in every firework-filled market, investors risk losing fingers and eyebrows if they aren’t deft with emerging-market explosives. In the Indian market, overvaluation is a ticking time-bomb – and that’s if corporate scandals don’t blow your face off first. 

What’s happening?

As the US and China endlessly slap-fight each other, analysts have looked for opportunities in other markets and settled on India for its favourable demographics and lower tariff risks. 

The subcontinent continues to be Morgan Stanley’s most preferred market. Its analysts noted that India has plenty of stocks that will benefit from the sheer force of 1.4 billion people buying things.

India is also one of the few emerging economies that has successfully converted economic growth into shareholder returns. Franklin Templeton analysts note that India has the highest correlation between corporate earnings and gross domestic product growth, compared to the country’s emerging-market peers. 

Why it matters

The bullishness over India is underpinned by actual economic firepower. Its economy is on track to surpass Japan’s by 2025, becoming the fourth largest globally. Trade tensions elsewhere have been a manufacturing boon for the country – some estimate that Apple will make more than a fifth of its iPhones in India by the end of next year. 

There are signs, though, that the Indian market has gotten out over its skis. Despite a recent sell-off, Indian stock valuations still look rich. At the same time, the biggest Indian firms posted their worst showing in more than four years for the Q3 earnings season, plagued by lower government spending and bad weather.

Investors have been skittish. Pace 360, a wealth management firm, found that controlling corporate shareholders of India’s listed firms have actually been average net sellers of almost US$1 billion of stock a month on the secondary market over the past 15 months, The Economist reported last month. In October, global funds yanked more than US$10 billion from Indian equities on a net basis. Observers believe that earnings growth and valuations have “more room to moderate”.

Julius Baer, however, remains bullish on India as a secular growth story with long-term investment potential. Its chief investment officer and head of investment management in Asia said last week that “Should there be a correction in India on a global cycle, it is all the more reason to buy a little bit more of India.”

But even if you were minding your own business and holding some placid industrial stocks, you might still come undone for other reasons. The bribery allegations against the chairman of Indian conglomerate Adani Group has already spooked international partners and dealt environmental, social and governance funds a world of pain, even as some investors have stood by the group.

Singapore’s corporate sector, in comparison, has been relatively insulated from the fallout. Local banks’ exposure to Adani Group appears limited, The Straits Times found. 

But if it is more exposure to India you’re seeking instead of less, there are various locally listed heavyweights to consider. There is CapitaLand India Trust with its portfolio of business space and data centres in India. Wilmar International, for better or worse, is in an edible oil and food business joint venture with Adani Group. And Singtel holds a significant stake in Bharti Airtel, one of India’s largest telecom operators.

There are ways to ratchet exposure up and down, either with exchange-traded funds (ETFs) of Indian equities or a more varied basket of regional stocks like the MSCI All-Country Asia Pacific ex Japan ETF.

But as always, when handling emerging-market dynamite, you will need your wits if you want to keep your bits.

The big number: 4%

Unlike Wicked’s Elphaba, the interest rate for the Central Provident Fund’s Special, MediSave and Retirement Accounts (SMRA) is no longer defying gravity. 

Come Q1 2025, the SMRA interest rate will thud back down to its 4 per cent floor, after having spent all of 2024 above it.

The fall from the current quarter’s 4.14 per cent per annum reflects a decline in the 12-month average yield of 10-year Singapore Government Securities to which the SMRA interest rate is pegged. 

Other risk-free assets will be working less hard for you in 2025, too. Experts believe that the current higher yields on Singapore Savings Bonds and Treasury bills (T-bills) are unlikely to last as the US cuts rates, however slowly. 

This is sobering news for current and aspiring retirees who are battling the winged monkeys of inflation, higher medical costs and reinvestment risk. Already, the cut-off yield on Singapore’s latest six-month T-bill was 3 per cent per annum, down from the 3.74 per cent rate for the one issued in late June. 

In his Sense & Cents column last week, BT’s Leslie Yee warns retirees of the perils of relying on T-bill income. Instead, retirees might need to diversify further up the risk-reward ladder to cover expenses.

They could look for high-quality equities with an entry annual dividend yield of 5 per cent, Yee suggests. Or a Singapore dollar bond from a sturdy corporate issuer that yields close to 4 per cent annually and takes years to mature.

The higher risk-free rates of the post-pandemic years were good while they lasted. But we’re not in Kansas anymore. 

(Disclosure: I own shares in CapitaLand India Trust and Singtel.)

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