Opinion The money will return

While most Japanese firms have chosen to team up with Indian players — Suzuki with the government of India,Honda with Hero or DoCoMo with Tata Teleservices — of late,they have also bought out businesses. Daiichi Sankyo,for instance,bought out Ranbaxy. It’s not that these companies will altogether stop coming to India — the Nippon Life-Reliance Capital deal did go through. But it’s possible other joint ventures could be delayed,though these delays would be temporary as would be any disruption in portfolio flows whether into the debt or equity markets. Asia,as a region,is of course more exposed to Japanese trade; but once Japan starts to rebuild itself,it should start importing from Asia and again the disruption,hopefully,shouldn’t last longer than five to six months. What’s more worrying is that crude oil prices have already moved back up to $116 per barrel levels with the political problems in the Middle East still unresolved and the UN authorising military forces against Libya.

Indeed,more than the disaster in Japan,rising crude oil prices,which are expected to average $105 a barrel in 2011 and could fuel inflation,will hurt the sentiment in the Indian market. Inflation is cause for concern in most Asian markets — earlier this month,China upped its benchmark one-year lending rate to 6.06,the third increase since mid-October after growth accelerated and inflation stayed above 4 per cent for a third month. India imports three-fourths of its requirement of oil and a $1 per barrel increase in oil prices would push up India’s trade deficit by $800 million and leave oil companies with $700 million less unless prices are raised at the pump.

Should the government choose to pass on some of that increase to consumers,inflation,which has averaged 8 per cent in the past year could remain at 7 per cent next year too. The Reserve Bank’s monetary review last Thursday confirms what economists have been saying all along; prices will continue to go up,increasing risks to growth. Given these macroeconomic headwinds,GDP growth estimates for 2011-12 have already been pruned to levels of 8-plus per cent,way below the 9 per cent hoped for earlier,with a couple of economists saying it could come in at sub 8 per cent. What’s increasingly worrying is that new investments,which together with consumption should drive the economy,aren’t taking off; fixed capital formation,after rising a smart 15 per cent in the first half of 2010-11,will grow in just single digits in the second half. Consumption demand is expected to remain buoyant thanks to rising rural incomes and growth in sectors such as IT,which create jobs. Should interest rates continue to trend up,however,as they are likely to do if the RBI has its way,companies will hesitate to roll out new capacities,unless they’re sure they can sell what they make. The silver lining in the macroeconomic cloud has been exports; the recovery in the US and a couple of other overseas economies has helped companies that sell overseas. Nonetheless,growth is slowing down,with factory output expected to grow at around 7.6 per cent next year.

It’s hardly surprising,therefore,that following the disappointing results turned in by companies in the December quarter earnings season,most analysts have scaled back their earnings estimates for next year. Bank of America Merrill Lynch has pruned the earnings estimate for the Sensex set of companies to Rs 1,265 from Rs 1,300 for 2011-12. Even after this the brokerage believes there could be further downgrades with earnings growing by just 15-16 per cent. India’s vulnerability to higher crude oil prices,the unfavourable macroeconomic environment,a series of scams and concerns about the government’s inaction on the policy front,have seen fund managers take risk off the table,leaving it among the worst performers in the region.

At a time when the US economy has been recovering,there has been a rotation of resources with money moving out of Emerging Markets (EMs) — more than $21 billion has been withdrawn in the first two months of the year — and into the US. As a result,the Indian markets have lost nearly 13 per cent since the start of the year and the Sensex now trades at a reasonable forward price-earnings multiple of 14 times,a shade lower than its five-year average. The market may not be cheap but it’s not expensive either and the premium to other markets in Asia has compressed. That’s one reason stock prices aren’t likely to grind down too much unless things get much worse in Japan and the US goes into a double-dip recession. Although India may not attract the kind of portfolio flows that it did in 2010,of about $29 billion,it remains a high growth market with a large universe of companies,a market that no fund manager can afford to ignore. They may have pulled out close to $2 billion so far this year,but it should soon flow back.

The writer is resident editor,‘The Financial Express’,Mumbai
shobhana.subramanian@expressindia.com