Many foreign institutional investors had been saying that the India story had serious concerns. FIIs, such as Bank of America Merill Lynch, BNP Paribas and Credit Suisse, had late last week expressed their reservations about Indian stocks.
However, FII outflows from India that continued unabated from April 25 to May 6 saw a trend reversal in the last two days as they turned net buyers, albeit marginally.
BofA-Merrill Lynch in its report said a 2008-like crash is highly unlikely, earnings growth, though slowing a tad, is visible, and a 10 per cent market correction is a good buying opportunity, even though inflation remained a primary concern. Morgan Stanley Mutual Fund in its equity outlook for May had suggested that India was seeing a resurgence in inflation.
The report also added that the current environment is not conducive to equities and that more volatility and market corrections could follow. The fund house has advised investors to see the recent market correction and consolidation as a short-term phenomenon and not as a lasting trend.
Sector-specific
The fund said it is focussing on those sectors and stocks that could manage inflation and exhibit earnings growth. The fund house is overweight on pharmaceuticals, software services and consumer products, and underweight on the domestic cyclical sectors, which include banking, auto, industrials, infrastructure and commodities.
Some fund officials have mixed views: “Commodity prices have started falling in the last three to four days and hence it is highly unlikely that Indian equities will see a correction in the near term,” said Mr K. Ramanathan, Chief Investment Officer – Single Manager Investments, ING Investment Management. “There is an expectation of an earnings downgrade and some de-rating is also possible,” he added.
Credit Suisse in its report said there was more to the slowdown in India than inflation.
Only a small part of inflation in India is imported whereas domestic inflation was high even before global commodity prices started rising. Stuttering reforms and poor governance in some States would not allow the positive trend to last too long, it said.
BNP Paribas Securities in its report said though India has underperformed due to inflation, rate worries and politics, an asymmetric correction (correction in certain sectors and stocks) has created buying opportunities in some fundamentally good stocks.
OECD below trendline
Nomura Financial Advisory in its India Economics and Rates outlook for May 2011 stated that domestic industrial activity was losing momentum as OECD's composite leading index for India was below its long-term trendline. Capital expenditure had significantly slowed down in March as shown by projects under implementation data.
Though the real salary hike in India was estimated at 3.5 per cent year on year interest rate increases would dampen discretionary consumption.
The increasing gap between consumption and investments are worrying said the report and assessed that fiscal deficit as a percentage of GDP for FY12 would be 5.2 with an upward bias due to subsidies being under budgeted.
They have asked clients to stay away from G-Secs for a while longer.