Japan's Investors Flock to India
Cash Inflow Spotlights Concerns
Stocks May Be Getting Too Pricey
By ERIC BELLMAN
Staff Reporter of THE WALL STREET JOURNAL
October 5, 2005; Page C14
Japanese investors are starting to switch their bets on the future of Asia -- pulling billions of dollars out of China's stock markets and dumping them into the red-hot Indian market.
The influx is highlighting concerns that booming Indian stocks may be getting overpriced and that Japanese investors might be late arriving.
As recently as a year ago, Japan's portfolio investments in India were eclipsed even by those of the tiny city-state of Singapore. At the time, there was only one India-dedicated mutual fund for Japanese investors, and it had less than $20 million invested in the subcontinent. Today, there are more than 10 India funds in Japan with close to $4 billion here. The new Japanese funds are equivalent to half of the international interest in India.
Meanwhile, the total amount of Japanese funds invested in China has dropped to $4.75 billion from about $7 billion.
With a total of around $8 billion of net buying by all foreign investors this year, the new Japanese funds are equivalent to half the international interest in India.
"The Japanese have a tradition of coming in after everybody else," says John Band, president of consulting firm Zoom Cortex in Mumbai, formerly Bombay. "Historically, they were indicators of a good sell." He says that may be the case again.
In India, the fresh fund flow from Japan has played an important part in keeping India's stock market surging to records almost every week for the past three months, analysts say. The benchmark Bombay Stock Exchange 30-Share Sensitive Index, or Sensex, has risen 50% since a rush of Japanese investors discovered India a year ago.
Japanese investors are switching to India because they expect better profits, performance and politics from the subcontinent. China funds had been popular in Japan just two years ago, but investors haven't seen the returns they hoped for.
China's stock markets have fallen more than 15% over the past two years while India's market has risen 90%. Meanwhile, anti-Japan protests in China last year persuaded many investors they had to diversify and look for growth in Asia's other booming, billion-person economy.
The riots made Japanese fund managers and companies reconsider how they want to position their international assets.
"Investors were getting tired of the China story," says Haruhiko Sakamoto, head of marketing and planning at HSBC Investments Japan in Tokyo, which launched one of the first India funds last November. "Then the anti-Japan riots made them think twice about putting money into China."
Japanese funds are investing in the blue-chip companies of India, including petrochemical and petroleum company Reliance Industries, software-outsourcing company Infosys Technologies and auto maker Maruti Udyog. India's best companies expect annual profit growth of more than 20% a year for the next three years.
India clocked some of the highest economic expansion in the world last year; its gross domestic product grew a real 7% in the 12 months ended March 31. This year, it is expected to grow even more. That is a big change from as recently as 2001 to 2003, when GDP expansion swung between 4% and 6%. India's new growth is being powered by low interest rates, a higher-spending Indian consumer, exports and bumper crops.
While China's economy expanded more than 9% last year and is expected to grow another 9% this year, an increasing number of Japanese investors are concerned that China's economy is overheating the way their own economy did in the 1980s. India will be a safer bet, they hope, because it is just starting to take off.
"Everyone has been thinking that, after China, India is next," says Yoshihito Suzuki, a manager of the corporate-planning department at Nomura Asset Management Corp., which had to close its new India fund only one day after it launched this June because of overwhelming demand. "We had expected to raise 50 billion yen [$438 million], but we got 100 billion yen in the first day."
There are questions about whether India's stock-market boom is sustainable -- and whether Japanese money is entering the market late in the rally. It has happened before: Traditionally cautious, Japanese investors were some of the last investors in the U.S. property market before it started sliding in the 1980s. They were late, too, to the dot-com boom in the late 1990s. As such, some analysts warn that a flood of Japanese money isn't always a sign of good things to come.
"They are obviously just waking up to the story of India," said Andrew Holland, executive vice president of research at DSP Merrill Lynch in Mumbai.
While high profit growth is expected in India, the valuation of stocks is already stretched, analysts say. Indian stocks are trading at multiples of more than 16 times this fiscal year's earnings, which is above their four-year average price/earnings ratio -- closer to 13.
"Markets are already at the top end of the valuation band," says Sanjiv Duggal, the Mumbai-based chief investment officer at HSBC Investments India who helps invest HSBC's Japanese funds.
Concern that the stock market is overpriced has triggered volatility, with many stocks and indexes swinging more than 5% some days. The Sensex hit a record closing high again this week, but some fund managers and analysts worry that new bad news could trigger a correction. |
