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Opinion | Why a rebound in Indian markets is some time away.

Date: 12-10-2018
Subject: Opinion | Why a rebound in Indian markets is some time away
Murphy’s law has struck emerging markets in 2018: all that could go wrong is going wrong. Global financial tightening as big central banks shrink their balance sheets, a strong US dollar, the trade war between the US and China, political turmoil and rising oil prices have all resulted in money fleeing emerging markets and finding its way to the US.

The exchange traded funds (ETF) in emerging markets have been on a losing streak since the start of 2018. The iShares MSCI Emerging Markets ETF has lost nearly 12.8 percent since the start of the year while at the same time the iShares Core S&P Fund has delivered a return of 6.5 percent. The $30 billion iShares MSCI Emerging Markets ETF has seen over $5 billion in withdrawals in 2018 or nearly 16.6 percent of its corpus.

India has been no exception. So far this year, the Sensex has shed 2.81 percent compared to 12.8 percent for MSCI Emerging Markets. Foreign institutional investors have been selling Indian equities and debt for a while now as US bond yields touch multi-year highs. Indeed, the performance would have been worse but for the cushion provided by strong domestic inflows from mutual funds. Thus, while FII money is welcome, it is no longer a big driver of Indian markets.

In the near term, the driver for markets will be corporate profit growth numbers. Expectations are high on this front. For instance, Motilal Oswal projects that sales of companies comprising the Nifty are expected to grow at 23.7 percent from a year ago. This growth, the research firm says, will be a multi-year high. However, higher input costs are likely to result in operating profit increasing by only 11.7 percent while net profits may increase by 11.8 percent.

Domestic economic growth has also picked up supported by domestic consumption and strengthening investment. A good Kharif crop and a possibly better Rabi crop will ensure strong demand from the hinterland. In the medium to long-term growth will depend on the domestic and global environment. Structural reforms will ensure that growth is robust in the medium term as well, projects the International Monetary Fund (IMF).

That’s the good news.

Global growth is tapering off.  Economists are fearing a slowdown in 2019 after the impact of the US-China trade war starts showing on the numbers and there will be no export push to growth in India. The IMF has downgraded economic growth numbers for US and China, two major trading partners of India, by 20 basis points each to 2.5 percent and 6.2 percent respectively.

Secondly, while growth prospects are attractive for India, valuations are not. India is still the most expensive market among the emerging markets group while at the same time it is the best performing market on a year-to-date return basis.

While high valuations would be playing on investors mind, the bigger fear factors would be the depreciating currency and rising oil prices. While central banks of most emerging markets increased interest rates to attract flows, India and China’s central bank continue to play defense. China has in fact pumped in $109 billion in the economy by bringing down reserve ratios.In the first week of October emerging markets have seen $1.8 billion of inflows, split evenly between debt and equities. India however, has seen a net outflow in both these segments during the week.

Madhavi Arora, economist, forex and rates, Edelweiss Securities has been quoted as saying that China and India are on a similar trajectory where domestic macro dynamics (even though not exactly similar) seem to have taken precedence over higher rates to align with Fed normalisation.

The rupee is expected to be under pressure as after the US European Commercial Bank (ECB) too will stop the quantitative easing (QE) programme from the end of 2018. This could further lead to outflows.

In an election season, where the government has already succumbed to populism and cut the duty on fuel prices and risks missing its fiscal deficit target is yet another factor that could play spoilsport.

A let up in the continuous slide in the rupee and rise in oil prices might help as would a more dovish US Fed. But the odds are stacked against these. A rebound looks some time away.

Source: moneycontrol.com

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