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Credit Suisse rates India second best after Hong Kong for investment in Asia

India is one of the best places in Asia for investment because of its inherent strengths that are different to the rest of the region, says a report on India market strategy compiled by Credit Suisse of First Boston.

''Our risk-adjusted return work shows that India is the second best in the region after Hong Kong. This is compelling,'' says the report.

It said that the growth and monetary policy cycles were very different in India. Whilst the region is being pummeled by negative economic growth and ludicrously high real interest rates, the Indian economy and de facto companies are unfettered. They will benefit from the low real rates while the currency is allowed to take the strain.

On the corporate sector, the report said that the percentage of companies engaged in creating shareholder value in India was the second highest in the region. In addition, this is the first time in the last five years that India will have the fastest earnings growth in Asia.

While everyone is preoccupied with the expected impact from the crisis of Japanese currency, it said that India would have relatively little impact because India's export to Japan account for only 7.3 per cent of the total whereas India exports more than 47 per cent to high-growth countries.

The Credit Suisse which undertook a detailed analysis of risk-adjusted return (RAR) in Asia for the period of 1990 to 1997 in both local currency and US dollars, observed that India was consistently ranked as the second best market behind Hong Kong and the risk premium for the Indian market should fall decisively given that the market discounts political risk efficiently.

Average daily trading volumes of shares in India this year have averaged the third highest in the region behind Taiwan and Hong Kong and this will continue to outperform over the next quarter.

On political instability at the centre where the BJP-led coalition government is under pressure, the report said if the Congress party gets into power, it would be positive for the equity market because the new finance minister is likely to be Dr Manmohan Singh, the architect of the pro-reform programme. The negative scenario is lingering political instability in which the central government is paralysed and the structural reforms are not implemented.

On interest rates, it expected that the rates would rise about 1.5 per cent from the current levels and decline gently by about 0.75 per cent by the end of the current financial year. The fiscal deficit will be higher than initial government expectations of 5.6 per cent of gross domestic product. This crowding out is likely to have an impact on domestic liquidity and may explain some of the increase in bank credit growth as companies hoard cash ahead of a perceived shortage.

Putting the BSE-30 index target at 3,750 points by December and 4,500 points in the next 12 months from now, the report said that one should be cautious on the relationship between equity earnings yield and local short rates as the operating margins are essentially flat in the near future.

UNI