Acombination of local and global factors is adding short-term uncertainty to Indian stock markets and the next two months will be fraught with volatility, according to fund managers and analysts, many of whom are predicting a decline of 5-10%.
That’s despite growth prospects for Asia’s third largest economy remaining intact. The government expects the economy to post 8.5% growth in the current fiscal.
The Sensex, India’s benchmark equity index, has gained some 4% this calendar year in comparison with a 3% decline for the MSCI World index. Last fortnight, it hit a 30-month high of 18,454.9 and has been hovering at those levels since.
State-owned Coal India Ltd’s `17,700 crore initial public offering, India’s largest new share sale, will be the key, investors say.
“The real test will be Coal India,” said Nandan Chakraborty, managing director of institutional equity research at Enam Securities Ltd. “Once it hits, we’ll have to wait and see if markets fall or rise.” He does not expect a correction to be more than 5% if it happens, but warns of short-term volatility.
“We expect the markets to correct by 7-8%”, said Nischal Maheshwari, head of research at Edelweiss Securities Ltd.
The reasons are obvious. The economic situation looks grim in the US and Europe. A weak US recovery will affect risk appetite and slow the pace of foreign institutional investor (FII) inflows into the country, if not reverse it.
“Bond yields in Europe have been rising again and the uncertainty regarding global recovery has emerged as a major risk and could impact FII inflows,” said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp, a global fund registered as an FII in India.
FIIs have pumped in some $13 billion (`60,710 crore) so far this year, with $2.5 billion coming in August alone. But the global nervousness poses a big question mark on the continued strength of these inflows despite a good set of domestic numbers, such as 8.8% first quarter economic growth and slowing of inflation.
“Household spending (in the US) is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in non-residential structures continues to be weak and employers remain reluctant to add to payrolls,” said the US Federal Reserve after its 10 August meeting.
“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee, the policymaking body of the Fed, added.
Housing prices in the UK fell for a second month in a row in August, fuelling recovery concerns.
What’s also spooking the market is the fresh paper supply among emerging markets that could soak up some $100 billion of investor money in the next few months as new share sales such as the $25 billion offering from Brazil’s Petrobras.
This investor money would have otherwise gone into buying secondary market equities and propped up share prices. Indian firms are slated to raise some $5-7 billion by the end of the year, with the Coal India issue leading the way.
With new norms for unit-linked insurance plans, or Ulips, likely to stem investment flows from this sector, there are enough indications of a correction waiting to take place, experts said. A cap on Ulip distribution charges and guaranteed returns on pension products means there may be less money coming through this instrument and a greater portion of inflows going to the market, they added.
“There are reasons to believe that a moderate correction could be on the cards. One has to be mindful that whatever rally has happened has been largely driven by FIIs, who might not be pumping in as much money this month as they were doing earlier, owing to weaknesses in foreign markets”, Bhat said.
“Given the weakness in domestic institutional flows and the uncertainty surrounding the insurance sector, this might be enough to pull down markets,” he added.
At current levels, the Sensex is trading at 18 times the estimated earnings for the fiscal.
“The growth in earnings has been satisfactory, but there is some amount of valuation discomfort,” said S. Naren, chief investment officer of ICICI Prudential Asset Management Co., India’s second largest mutual fund with `90,179 crore worth of assets under management.
“The (corporate) results have not provided any reason for cheer in the first quarter, and outlook about corporate earnings remains tepid for the next two quarters while the GDP growth recovery has already been factored in,” said Saurabh Mukherjea, head of Indian equities at UK-based investment advisory firm Execution Noble.
“The only trigger for the market to go up could be the Q2 numbers, which would give us greater visibility about the potential for earnings growth in FY11 and FY12,” said Dipen Shah, senior vice-president, private client group research, Kotak Securities Ltd.
That would depend on whether firms are able to pass on increased raw material costs to consumers, the impact of interest costs and the execution of capital-intensive projects with fewer delays, he said.
Source: http://www.livemint.com/2010/09/05211601/Analysts-warn-of-shortterm-vo.html?atype=tp
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