In a report titled 'Pessimistic markets, low P/Es – An opportunity for the long-term investor', the fund says stock valuations have come to a level where they present good investment opportunities to long-term investors.
Here are key highlights from the report.
Indian economic growth
From being about a $1.7 trillion economy, India is expected to become a $6.6 trillion economy by 2020, which may make it the fifth largest in the world.
In other metrics, Indian exports are poised to more than treble from $250 billion to $815 billion by then. To highlight consumption levels for the domestic economy, the report says 2- and 4-wheeler sales will more double from current levels.
Increasing affordability, low penetration of consumer goods, increasing credit, favourable demographics and increasing export competitiveness point to sustained economic growth ahead.
About 40% of India's population in 2010 was under 19 years of age, signaling a "large number should move into working age in the next 10 years".
Also, India's savings rate is expected to grow while dependency ratio (proportion of population above 60 years divided by working population) is poised to come down over the next 15 years.
On exports, the Indian rupee has depreciated by more than 50% against the Chinese yuan in the past five years, from about 5.2 levels to 8.5 recently. This, along with rising wage inflation in China, should help Indian exports become more competitive.
Opportunity in adversity
The key challenge in the short-term continues to remain the country's fiscal deficit situation as taxes collected as a proportion of GDP has fallen in the past few years while government expenditure on social services and rural development has grown.
But challenges usually lead to a change, as was seen during the liberalization of the Indian economy in 1992, which was triggered by the balance of payments crisis.
Similarly, one may see transparency in land acquisition policy, competitive bidding for natural resources, reforms in power distribution, better management of subsidies and taxation, and greater steps to tackle corruption.
Markets, which are down about 25% from their January 2008 peak, seem to have discounted most negatives, and the key indexes are trading at 12 times one-year forward earnings, which is 25% below long-term averages.
Indian stocks were trading at 11 times forward earnings both during after the September 11 attacks, which were followed by a global economic slowdown, and during the 2008 crisis, and investors who bought during these times made saw the index gain 91% and 77%, respectively, in the three years since.
The case for stocks
Bond yields and equity yields are currently nearly the same, which points to an under-valuation of equities, while bond yields may fall further below this year.
If the index stays at current levels, it should come down to 11 times forward earnings, a level that has been about the bottom for Indian stocks even during times of extreme crises in the past, pointing to room for P/E expansion.
Further, statistics show that whenever the market's returns of the past five years have been low (the Sensex has returned 2.3% annualized between 2007 and 2011), the next five have been strong as valuations expand and earnings growth catches up.
