Emerging Markets Week: India's 'baby steps' not enough for investors
by Chris Marshall on Jun 17, 2011 at 00:01
It’s a bold investor who takes a punt on India’s stock market this summer. Even the team behind JPMorgan’s Indian investment trustadmit that a ‘few more quarters’ will pass before the market looks attractive again.
Investors are choking on chronic inflation. On Tuesday the Indian government announced that the wholesale-price index rose 9.06% from a year earlier in May. And judging by its track record of revising these figures, the May number could end up even higher.
The authorities are taking action, with the central bank (RBI) raising rates on Thursday for the 10th time since 2010. Yet inflation remains ‘much above’ the bank’s comfort zone (their own words). The stock market volatility – and losses – seen so far this year are expected to continue until the central bank finds its comfort zone again.
Economists say the central bank, though pro-active compared with its peers in the emerging world, is partly to blame. They’ve been taking ‘baby steps’, says Brian Coulton, emerging markets strategist at Legal & General, ‘and the consequences are being seen now’.
The RBI has changed approach in recent months and seems prepared to sacrifice economic growth in order to put a cap on rising prices.
The rate of economic growth is now decelerating and ‘growth indicators including credit, auto sales and the rising cost of capital are pointing to a slowdown,’ commented RBS economist Sanjay Mathur in a research note on Thursday.
Coulton adds that India’s widening current account deficit (meaning it imports more than it exports), and the government’s lack of fiscal space – a rarity in emerging markets – are also putting off investors.
This need to reduce the fiscal deficit was among concerns raised by the OECD in its annual economic survey of India published earlier this week. In the same breath the club of rich nations called for the authorities to ‘remain vigilant’ in the face of high inflation and volatile cash flows.
Economists expect prices to continue rising. Commenting after Thursday’s rate hike, Capital Economics’ Vishnu Varathan said: ‘Headline inflation looks set to rise for at least another three months and to go higher than previously expected.’
Nevertheless, Varathan concluded that ‘there is little reason to fear that India is heading for a hard landing’.
Coulton points to a disparity between domestic investors who have been selling more than foreign investors so far this year. The latter may be feeling the impact of high inflation more acutely, while the former may be taking a longer term view. After all, few doubt India’s long term appeal.
And not everyone agrees that the country, the best performing BRIC market in 2010, is a short term dud. Peter Kirkman, the Citywire A rated manager of the JP Morgan Global Consumer fund, recently said that he had been buying aggressively into India to take advantage of falling share prices. In both India and China ‘we are finding a lot of mid/small cap names with great growth potential where valuations have corrected very sharply, often as much as 40% to 50%,’ said Kirkman.
Other investors might choose to stand on the sidelines for a little while longer.
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