India to Avoid Stock Drop as Growth Leapfrogs China (Update2)

Aug. 20 (Bloomberg) -- Indian stocks will avoid a sell-off that drove China into a bear market yesterday as the South Asian nation is poised to topple its neighbor as the world’s fastest growing economy, ICICI Prudential Life Insurance Co. said.

“India’s economy will grow faster than China’s next year,” Puneet Nanda, executive vice president at ICICI Prudential, the country’s largest private insurer with $6 billion in equities, said in an interview in Mumbai yesterday. “Industrial and services sectors will grow far more rapidly than expected.”

India’s economy may expand this year at a faster pace than earlier forecast as business confidence rebounds, buoyed by government stimulus measures and record low borrowing costs, the central bank said July 27. China’s main stock index yesterday fell into a bear market, denoted by a 20 percent decline from its peak this year on Aug. 4, on concern economic growth will falter as banks rein in lending.

India’s benchmark Sensitive Index has slid 5.3 percent from its Aug. 3 peak. The measure is still up 56 percent this year, the ninth-best performer among 89 global indexes tracked by Bloomberg. The gauge gained 1.6 percent to 15,051.4 at 1:32 p.m. in Mumbai trading today.

“People are underestimating how good the second half will be,” Nanda said. “We are betting on a strong recovery.”

China’s Shanghai Composite Index today rose 4.5 percent, the most since March and erasing yesterday’s 4.3 percent slide. Still, the gauge is 16 percent below its Aug. 4 high.

Accelerating Production

India’s industrial production increased at the fastest pace in 16 months in June, adding to signs that Asia’s third-largest economy has escaped the worst of the global recession as low interest rates have encouraged consumers to borrow to buy cars, motorbikes and other factory-made goods.

India’s economic growth may exceed 7 percent in the fiscal year to March 31, and as much as 10 percent in the following year, Nanda said. China’s gross domestic product may expand 7.2 percent this year and 7.7 percent in 2010, the World Bank forecast on June 22.

Concern that insufficient rainfall will trigger a decline in India’s stocks is “over-rated,” Puneet said. “Agriculture’s contribution to the economy is just 17 percent.”

Drought Fears

Indian stocks may slide as much as 15 percent on concern that lower monsoon rainfall will slash farm output and cut consumer spending, Bank of America Merrill Lynch said on Aug. 17, saying it expects the nation’s economy to expand 5.8 percent this year. Citigroup Inc. on Aug. 18 cut its forecast for economic growth to the same pace, citing the drought.

The seasonal monsoon, which delivers about three-quarters of the nation’s annual rainfall, may be the driest in seven years, Ajit Tyagi, director general at the India Meteorological Department, said on Aug. 13, adding that may curb farm output in the world’s second-biggest producer of rice, wheat and sugar.

“India remains very attractive for equity opportunities,” Nanda said. He prefers shares in companies that will benefit from economic growth by building power plants, roads and automobiles and providing services including banking and engineering. He declined to name specific stocks.

Spending

Teera Chanpongsang, the Hong Kong-based manager of Fidelity International’s $2.3 billion India Focus Fund shares Nanda’s optimism that an economic recovery in the South Asian nation will buoy its stocks, saying government spending in rural areas will mitigate the effect of diminished monsoon rains.

India’s Sensitive Index is valued at 17.7 times estimated earnings while the Shanghai Composite Index trades at 22 times earnings and the MSCI Asia Pacific Index is valued at 24 times.

The nation’s insurance companies will probably buy more than the $12 billion of stocks this year than they bought in the Indian stock market last fiscal year, Nanda said.

“Indian equities could provide returns in the mid-teens over the next five to 10 years,” Nanda said.