In 2010, equities gained their lost ground. In the New Year, the bulls will gun for new heights. Though concerns are mounting over rising food inflation and widening trade deficit, opportunities are also galore. ET Intelligence Group does the crystal ball gazing
THE Indian equity markets fared better than most other emerging markets in 2010. And the New Year ushers the markets to next peaks, the levels that so far looked elusive. The momentum could be strong enough for this to happen given the increased consumerism, burgeoning rural demand, focus on infrastructure and rising exports. But the journey is muddled with concerns over unabated inflation, trade imbalances and delayed recovery in some of the developed countries.
What investors would be eager to know is whether India’s growth story would continue in the New Year and which way the markets would swing. ET Intelligence Group discussed some of the issues with experts from the banking, finance and markets who closely follow the macroeconomic developments.
The objective was to find out factors that are crucial for the next big leap in the New Year; to explore the opportunities and to figure out what can potentially go wrong. To make it simpler, we divided the factors into concerns and opportunities. But first, a heartening revelation — most of the experts feel that some of the concerns that the nation is grappling with today are tomorrow’s opportunities in disguise. For instance, the consensus was that the administrative slack that was exposed through incidents of poor decision-making by those who handle public posts would give way to cleaner and transparent administration. Also, a few experts drew attention to some of the current opportunities that may become concerns if not attended to in time. Take for example, India’s booming international trade. The speed at which India’s exports grew in the period that followed the financial meltdown in the West is stunning. But, this may encounter headwinds if European and US economies suffer a further delay in all-round recovery.
Read on to know more about what can impede the growth of our economy and the markets in the New Year and what can offer a fresh impetus.
OPPORTUNITIES
Reducing Gap Between Rural And Urban Economies
Rural India will be the next big destination for consumerism to grow with more and more companies focusing on rural population. Experts feel that higher rural participation will fuel the next phase of growth in consumer spending. This is visible from the faster pace at which telecom and two-wheeler companies have expanded their markets in remote regions.
The rural theme also keeps Indian economy insulated from the global economic hiccups. “Rural penetration would fuel growth for telcos, auto players, FMCG and financial services firms,” says Samiran Chakraborty, who heads the research operations of Standard Chartered Bank India.
Cleaner And Efficient Administration
This is undoubtedly the most important factor that is likely to sweep the power corridors of the country. The recent scams have raised questions about the political and bureaucratic ethos of the country. Observers, however, think that it may not slow down the foreign capital flow. They think it instead will help making the system efficient and transparent. “A greater efficiency means sectors, such as infrastructure, might receive the required attention and project work may pick up,” says Abheek Barua, chief economist of HDFC Bank.
Firm Growth Momentum
The Indian economy is expected to grow at 8.5-9% in this fiscal. Enhanced rural income, higher industrial growth and a good capital expenditure cycle have been the leading contributors to this growth in demand. Also, half of the 1.2-billion population is less than 25 years old. Such a young pool of workforce is necessary for the future growth.
Steps Towards Reducing Energy Deficit
Despite its status as the second-fastest growing economy in the world, India suffers from energy shortage. Take for instance the coal shortage, India’s coal production in FY10 lagged the target production by nearly a half. This may change over the next decade with the government’s focus on developing natural resources. Further, commissioning of UMPPs in the coming years would help the cause.
CONCERNS
Inflation And Interest Rates
As the manufacturing capacities increase, demand for raw materials rises. Also, higher disposable income fuels demand for consumer goods. These factors have stoked inflation in the past few quarters. What makes the situation worse is that experts are finding it complex to determine the exact factors of inflation, especially in agriculture. “Dynamics of food prices is difficult to understand. Prices went up despite higher agro production,” says StanChart’s Mr Chakraborty. Inflation may remain firm. Goldman Sachs research estimates FY12 inflation at 6%, higher than the government’s comfort zone of 5-5.5%. GOLDMAN Sachs research estimates FY12 inflation at 6%, higher than the government’s comfort zone of 5-5.5%. To contain it, the central bank may have to tweak interest rates upwards. Rupa Rege Nitsure, chief economist at Bank of Baroda, says that higher inflation will stay for a while. “And as long as it is out of the comfortable range, we might see upward pressure on interest rates,” she adds.
Slack In The Non-Infra, Non-Durable Segments
Higher inflation and interest rates have started impacting growth. StanChart’s Mr Chakraborty draws attention to the sluggish trend in demand for non-infrastructure capital spending and for consumer nondurables. “In the 12 months to September, consumer durables rose 30% but non-durables grew a tad 3.5%. This is because the prices of non-durables have shot up whereas those for durables have not increased as much,” he says. Non-infra capital spend has also been lower. A report by Standard Chartered Bank highlights that most of the 87 projects approved by banks in the June 2010 quarter were in the infrastructure segment. Most of the infrastructure growth is due to the government focus to expand roads and develop water sources. But the private capital expenditure has remained muted. The momentum in these two categories will be necessary for the sustainable growth from hereon.
Burgeoning Current Account Deficit
India’s current account deficit has widened from 1% of GDP in FY05 to an estimated 3% for FY11. This is expected to rise to 4.3% by FY12 according to the estimates of Goldman Sachs. A major concern, says the research house, of the deficit is funded by short-term inflows. Rising oil prices could also be another concern since India imports nearly 70% of total crude oil requirement. A higher oil import bill would expand the trade deficit. The fiscal deficit could also expand since the impact of higher oil prices cannot be fully transferred to consumers due to the government subsidies.
European Sovereign Debt Crisis
A lot of attention is paid to the debt crisis in peripheral Euro zone and its potential negative impact on the global economy. For India, the direct impact could be marginal. This is because Indian exporters have a limited exposure to many of the countries in this region, such as Greece, Ireland, Portugal and Spain. These countries together accounted for just over 1.5% of India’s total exports of $ 178 billion in FY10. However, recurrence of crisis in this region may affect sentiments in the short term. The trend in the growth and that in the market would depend upon how these myriad factors take shape during 2011. Analysts feel that markets would remain rather muted at least until March 2011. “While upward movement looks limited for the markets, the downward pressure would be little since insurance companies tend to invest during this period,” says Vikas Khemani, institutional equities head, Edelweiss Capital.
At the current levels of over 20,000, the Sensex companies together trade at 20 times their trailing 12-month consolidated earnings. Analysts have reduced the growth forecast for the next fiscal to 15-18% from 20% after considering the macroeconomic factors. According to the revised estimates, the forward P/E of the Sensex is just over 17. This is much lower than the P/E of more than 23 two years ago when the index was at similar levels, which means the current valuations are not stretched. Experts feel that a chunk of the second US fiscal stimulus of around $600 million may find its way to the emerging equities. If that happens, investors need to keep a close eye on whether higher liquidity makes valuations unreasonable.
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