India's Booming Stocks Fail To Discount Huge Risks due to Herd Mentality of Institutional Investors

The Indian Growth Story is now common across global investors who have poured billion of dollars into India  in 2009 and 2010.The Sensex is touching new highs as it remains just 10%  below its all time highs.Fast Growing Economy,Favorable Demographics,Global Leading Private Companies,Huge Scope for Future Growth all make India the favorite of yield hungry Western Funds.However there are a lot of places where India could slip leading to a sharp decline in stocks.These risks have been gloated over by  the Herd Mentality of the Portfolio Managers.The $14 Billion in Foreign Investment could disappear much faster than it had come.Here are some of the risks which have not been priced in IMHO.

1) War with Pakistan over another Mumbai style Terrorist Attack – The 2008 Terrorist Attack on India’s Financial Nerve Centre was India’s Worst Terrorist Attack.The perpatrators are still sitting pretty in Pakistan biding their time for another attack.Pakistan have been proven to be a terrorist Nursery and a new attack would increase the Political Pressure on India to do something militarily.Pakistan despite being a basket case economically has a decent size Military besides being a Nuclear Power.A War without saying would lead to a devastating crash of the Stock Markets.

2) Increased Tension and Low Level Skirmish with China – India-China relations have become increasingly tense in the last few months with even India’s Prime Minister highlighting this problem.A Low Level Skirmish or Border Tensions between the 2 Asian Giants would be Lead to Stock Market Decline as Well

3) Growing Intensity of Maoist inspired  Naxalite Attacks – India is seeing rapid Income Inequality Growth with large sections of the population in distress over soaring food inflation.With 80% of the citizens living on below $2/day and World’s Richest Men inhabiting the same country,the result is potentially explosive.Naxalite Attacks have grown in both numbers and intensity.Maoist based Terrorism now affects most of India’s districts with large parts in total control of this Outfit.The Government remains totally confused on how to deal with this problem.Companies in the hinterland have been already been affected while other pay protection money.If these problem increases and these Naxalites infiltrate the cities,then expect India’s Growth Story to become an Illusion.

Summary

These risks are real and not going away any time soon.They are waiting tinderboxes which could flare up with a small spark.India has managed a substantial premium in valuations over other emerging markets over its Consumption Led Growth.Institutional Investors know no better than common ones as was apparent from the 2008 Lehman Crisis.They are playing the Emerging Market Game till the Music Lasts.Make Sure you are not the one who finds no chair when the Music Stops.