The India concerns should not distract from long-term investment opportunities

Love story of the past two years with the Indian stock exchange a beautiful and well embittered for three months Photo: AFP/Getty Images

Perhaps only the sporting nation obsession can divert attention to inflation and corruption currently defining policy and investment program.

Love story of the past two years with the Indian stock market has well and truly handsome for three months. In particular, foreign investors seem to have had a turnaround to invest in the subcontinent.

India index benchmark Sensex had soared to minimal March 2009 8,160 to slightly more than 21,000 last November, but the change of end of year in particular saw sentiment generally emerging markets and the India return to 17,463 a week or a 17pc ago, refuse. He has reinvigorated a bit on the coat tail of a more stable situation in Egypt, but confidence is low.

The electrification of the Indian political scene today corruption scandals would be doing justice to a Bollywood film. They highlight disorder overlap between Government and enterprises, with a group of characters who remind us that corporate has no need means dull when spiced with infinite wealth, celebrities and family quarrels. Anil Ambani, a billionaire high-visibility behind part of sprawling empire of corporate dependency the India, is the last to be questioned in a rapid enlargement corruption probe that has already claimed the scalp of the Minister of the Government telecommunications.

If corruption is a reminder that emerging investment market is not without risk as the fast recovery of the financial crisis may have suggested, the major concern of investors continues to be inflation. The India is particularly vulnerable to rising prices for products traded globally with food accounting for almost half of their basket of inflation and oil a key import.

While vegetables prices came off the coast of recently, it is typical of the period of the year which has tended to see prices facilitated in February before go up again in April. Inflation will probably peak in the second quarter, but remains poorly high and rising interest rates are likely to slow the growth rate and convince investors move their investments from equities to yield higher debt.

I must say that although I am not persuaded that the apparent movement of emerging markets to truly developed countries marks a turning point. Citigroup analyzed periods in the past 10 years or when emerging price market share were less developed markets, and makes the interesting observation that only two major periods of underperformance in 2000 and 2008) occurred in a context of anxiety on the prospects for global growth. In the 2008 downturn new market share fall was accompanied first, weakening material prices slip market currencies that are emerging against the dollar and poor performance by new bonds market compared to the US Treasuries.

This time, the performance of shares is the exception because skyrocketing prices for raw materials and bonds and emerging market currencies are largely moving their American counterparts. Which suggests that there are other reasons behind weak stock market and the continuation of the global recovery will equities to emerging market to recover their shape later in the year.

Withdrawal 17pc in just 12 weeks is disturbing, but it is by the course with the India, which is volatile even by the standards of emerging markets. In a chaotic democracy there is always something to worry about, but more recent concerns about governance and rising prices should not distract from long-term growth story.

Monetary Fund figures International point on an average growth rate between 2010 and 2015 8 4pc, compared to 4 FP6 for the world at large and much less in avr developed countries. A note from Goldman Sachs that crossed my desk this week summed up the case in the long term: "the India is the Hotel California investment - you can check anytime you liked but you can never leave".

tomrstevenson@fil.com

• Tom Stevenson is an investment at Fidelity International. The opinions expressed here and @ tomstevenson63 are its own.

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Aussie dollar breaks the buck as Australia, India fight Fed with 'quantitative tightening'

 The surging 'Aussie' captures the shift in the world's economic centre of gravity to the Pacific region. It was worth half a US dollar nine years ago. Photo: AFP

The long-awaited moment of "triple parity" seems imminent. The Swiss franc is already worth more than a greenback, and the Canadian dollar is seemingly poised to break through as well.

The surging "Aussie" - widely seen as a play on the China growth story and used by traders as a proxy for the Chinese yuan - captures the shift in the world's economic centre of gravity to the Pacific region. The currency was worth half a US dollar just nine years ago.

Australia's reserve bank said the "the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. The risk of inflation rising again over the medium term remains".

The move caught markets off guard. Credit growth has been cooling off over recent weeks and inflation is still just at 2.8pc - compared to 3.1pc in the UK - but the bank appears concerned about the risk of a wage spiral.

HSBC said emerging markets and commodity exporters such as Australia are opting for "quantitative tightening" to offset the liquidity effects of quantitative easing in the US, which is causing a flood of money into faster growing economies. Several states are toying with capital controls.

India's central bank has also tightened further, raising rates a quarter point to 6.25pc. It has imposed draconian housing curbs to reduce "excessive leveraging" and prick the bubble, limiting mortgages to 80pc of property values.

It may have responded with too little too late.

"Interest rates have been negative in real terms for 26 months, and heavily negative for several months," said Maya Bhandari from Lombard Street Research.

"Inflation is 9.8pc and is is going to get worse as the Fed's QE2 pushes up food prices, so a quarter point rate rise is not going to make much difference. They are relying on `administrative measures' instead of doing what they need to do," she said.

Ms Bhandari said the authorities had let rip with a "huge monetary and fiscal boost" before the elections in May 2009, leaving a legacy of overheating that is now coming back to haunt. The combined central and state budget deficit - including fuel subsidies - is nearly 11pc of GDP.

HSBC's currency team said the Australian dollar may be nearing its peak. "One concern relates to the deflating of the property bubble in China. This could happen gently but, if not, the Aussie will not avoid the fall-out. A sharp fall in Chinese property prices may very well lead to a deep examination of Australia's property bubble, and Australian banks," they wrote in a client note.

The report said Australia's lenders rely heavily on funding from abroad to finance the country's internal boom, creating a risky mismatch in liabilities. "Rationally or irrationally, this could turn very sour. The Aussie party looks set to come to an end soon," it said.

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