A lot of hype has gathered around India recently. The South Asian giant is on track to surpass China as the world’s most populous nation this year. It’s overtaking its neighbor in economic growth, too. India should expand by 6.1% during 2023, compared with 4.4% for China, the International Monetary Fund predicts.
India’s once-dreaded overpopulation has morphed, in economists’ eyes, into a “demographic dividend”: Citizens with a median age of 27.6, against China’s 37.9, will power progress for decades to come. Timely reforms from Prime Minister Narendra Modi are unleashing this latent juggernaut. That’s the line anyway.
Stock market valuations reflect this optimism. Indian stocks trade at an average price/earnings ratio around 19, compared with 10.5 in China, says Tom Masi, co-manager of the emerging wealth strategy at GW&K Investment Management.
But a short-seller’s attack on the country’s (and all of Asia’s) nominally richest person, Gautam Adani, highlights the risk of investing in an emerging market like India.
Last week, U.S.-based short seller Hindenburg Group released a report accusing the conglomerate of fraud and misconduct. The
decried Hindenburg’s “maliciously mischievous” research, which “has led to unwanted anguish for Indian citizens.” Markets reacted to the short seller. Adani’s companies lost an estimated $50 billion in value on Friday alone. Trading stopped for three of them, which hit the “circuit breaker” of a 20% loss in a single day.
Contagion spread across the market. The
iShares MSCI India
exchange-traded fund (INDA) has lost 4% since Hindenburg posted its broadside.
Adani fought back over the weekend, releasing a 413-page response that characterized most of Hindenburg’s allegations as old news. He also secured a $400 million investment from International Holding Co., a fund linked to the ruling family in Abu Dhabi, which already had $2 billion sunk into the Indian tycoon’s businesses.
Most of Adani’s public companies kept falling on Monday anyway, and internationally-traded bonds sank. The Indian index steadied, and rose on Tuesday.
Adani was a local port operator in the West coast state of Gujarat before 2014, when Modi, then Gujarat’s governor, was elected prime minister. Since then Adani’s interests have mushroomed across energy and infrastructure, within India and internationally. “Adani and Modi come from the same region of India and have a long relationship,” Masi says.
Adani’s listed entities were effectively closed shops for most of this time, with tiny free floats that were mostly held by offshore entities. “Negligible onshore ownership creates asymmetric risk-reward as large investors conspicuously avoid Adani,” Bloomberg Intelligence wrote in 2021.
That all changed last year, when index provider MSCI included Adani’s largest companies in various Indian and global indices. That forced in a flood of third-party money. Shares in
(533096.India), for instance, quadrupled in six months to a peak last August. That’s presumably the money that is flooding out now.
Adani himself seemed to decide he was ready for market prime time. He announced a $2.5 billion share offering for his parent entity, Adani Enterprises, to culminate Jan. 31. The offering on Tuesday was slightly oversubscribed, a sign that the company would be able to complete the deal, according to The Wall Street Journal.
The tumble in the value of the assets of Adani’s conglomerate could affect Indian state banks; loans to the group account for 0.7% of these banks’ total loans, according to Jefferies. More important is the reputational blow to a country that is supposed to be coming into its own as the next decade’s global growth leader.
Two years ago, Anil Ambani, scion of the
Industries conglomerate, defaulted on massive loans extended by lender
which seized his Mumbai headquarters. Yes Bank went into receivership shortly afterward. His brother Mukesh righted the Reliance ship, and may soon be India’s richest person again if Adani’s stocks fall further.
There is another India, of course. Many other Indias. It’s hard to see what Adani has to do, longer term, with global IT powers like
Tata Consultancy Services
(532540.India), or privately owned banks geared to a burgeoning middle class, like
(IBN). These four, plus Reliance, comprise the top five in the Indian index.
Indian stocks already face headwinds, though, as investors find renewed faith in the much-cheaper Chinese market, and shift funds accordingly. Adani’s travails certainly don’t help. “If India goes down another 3-5% and China up another 10-15%, we could reallocate back to India,” Masi says.
For the moment, the flow is going against it.