More Positive Reviews for India Shares

Boston-based research firm Celent is the latest to sing the praises of the Indian stock market

By Rita Raagas De Ramos

The Indian equity markets are showing signs of recovery, according to Celent, a Boston-based financial research and consulting firm. Although India's equity market capitalisation is still some way off the 2007 high of $3.3 trillion, it is expected to exceed 2008 levels in 2009 at $1.9 trillion, the firm says in its latest report on India shares.

Celent is the latest to sing praises for India's stock market. Earlier this month, Credit Suisse unveiled a new target of 17,000 for India's Bombay Stock Exchange benchmark index (Sensex). In June, BNP Paribas recommended its clients to reduce their exposure to China, which it has lowered to neutral from overweight, and increase their allocations to India, where the bank remains overweight. BNP Paribas' own target for the Sensex is 16,500. The Sensex closed at 15,160.24 on Friday.

The key findings of the Celent report include:

India is one of the main emerging equity markets. The country's leading stock exchange, National Stock Exchange (NSE) is ranked third in terms of the number of equity trades of individual exchanges. The Bombay Stock Exchange (BSE) is also one of the leading exchanges worldwide, and the Indian market continues to hold further promise, as the economy is expected to grow 5-6% even in the current economic downturn.

The NSE is expected to overtake the Bombay Stock Exchange (BSE) in market capitalisation in 2009. Already far ahead in turnover, the NSE is expected to further its lead. It has already cornered the exchange-based debt markets and the equity derivatives business and become the exchange of choice in India.

The NSE is preferred by foreign institutional investors (FIIs), while retail investors, domestic brokers, and sub-brokers prefer the BSE. NSE turnover is two times that of the BSE because FIIs hold on to shares for a shorter period of time than their local counterparts.

India's debt market is underdeveloped. In spite of growth, the Indian corporate debt market is far behind developed and emerging economies worldwide. At an expected turnover value of $70 billion in 2009, it is equal to less than 10% of the government debt market.

In the equity derivatives market, volatility has meant that the investors prefer to trade more in index derivatives because they are far more liquid than stock futures and options. Index futures and options now comprise 64% of the trading done in futures and options. Just like equities, the equity derivatives market has also recovered, and the turnover in the fiscal year 2010 is expected to be around $3 trillion, close to the figure in FY 2008. The growth in turnover and volume has made NSE one of the top 10 derivatives exchanges in the world. Having one of the highest growth rates in 2008 (56%), it is expected to do even better in the future. Interestingly, in spite of being more complex a product than cash equity, the equity derivatives market is quite popular with retail investors, and they had more than 50% of the market share consistently throughout the period of June 2008 to May 2009. This bodes well for the breadth of participation in the market.

The equity derivatives market is dominated by the NSE, due to the superior use of technology and better strategy. Also, the NSE has a high growth rate, and it is expected to break into the global top five by volume in the near future. In 2008, it had a trade volume of 590 million contracts and grew by 55.4% over the previous year. This made it the eighth largest derivatives exchange in the world.

Stock futures and options are not very liquid. The stock futures developed as the number of stocks traded has gone up from around 30 to 40 stocks to between 150 and 200. However, stock options are illiquid, except in the case of leading companies, meaning that a lot of transaction volume is driven by a few signatures. This situation could be worrisome in the long run, and there is certainly room for improvement.

Index futures and options dominate the NSE's equity derivatives portfolio.

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