India Still a Shining Star Among Emerging Markets
Published: 23rd August 2015 04:50 AM |
The Indian market is in a ‘fluid situation’ being caught in the interplay of multiple factors like Yuan devaluation, setback in reforms, US rate hike and Bihar polls. Global risk concerns such as Grexit, US Fed rate hike and Geopolitics dominated the markets for the early part of the year. The focus now has shifted to domestic factors and Yuan devaluation. The Nifty is likely to continue in the broad range of 8000 – 9000 and we are currently near the lower band at 8,300.
In spite of these risks, India is showing enough signs of confidence when compared to the other emerging countries. In dollar terms, Nifty return is -1.8% during the last 3 months compared to an average return of -11% by other emerging markets like China, Brazil, Russia, Turkey, Korea and Mexico. Though this outperformance by India is likely to continue we should also acknowledge the risks from US-dollar denominated investors in Asia continuing to be bearish. This concern is increasing as the expected hike in US rates, will be the first since the 2008 crisis and the slowdown in EM economies.
Overall, it will be a volatile quarter for the world. We believe that the US rate hike is a well discussed and understood state-of-affairs and unlikely to adversely impact our long-term investment horizon. But China’s economy is getting unstable, which will lead to further downgrade in the world economy.
For example, Moody’s has downgraded India’s GDP outlook to 7% from 7.5% for FY16. In the long-term, China’s loss of competitiveness will benefit India particular in light of its ‘Make in India’ policies. But in the short-term, due to the slowdown in the world economy, the Indian market is likely to see an increase in volatility, reduction in earnings forecast, delay in rate cut and currency devaluation.
Continued delay in passing GST and Land Bills has led to an erosion in investor confidence. The present political equations in the Rajya Sabha make it difficult to move ahead with these reforms. Additionally, the pre-poll survey for Bihar is not encouraging.
The market is currently disappointed due to RBI not cutting rates, in spite of the sharp fall in July CPI and WPI. This reduction is as per the RBI’s predictable scenario of base impact and hence as per the forthcoming data in Sept, RBI may decide on the rate cut. It also tells us that RBI is concerned about the high volatility in domestic currency due to the Yuan devaluation, since an immediate rate cut will see further erosion in Rupee value. But the watch list for RBI now is the US Fed move in Sept.
India is keeping its outperformance rank among the EMs. But the continued fall in EM equity & currency markets have ultimately led to a negative impact on India. We are likely to continue our relative outperformance but the absolute return would be at risk.
As expected, due to increased risk, investors are shifting to stable earnings sectors like Pharma, IT and FMCG. They have added support from Rupee devaluation leading to improvement in operating profit. During such volatile times investor should look at increasing their exposure in equity.