International | May 24 2006
By Chris Shaw (Tokyo)
Nowhere has there been a better example of the recent increase in volatility in financial markets than India, where the Sensex index of leading stocks lost as much as 17% in the space of a few trading days. (Bourse authorities even had to temporarily halt trading when share prices dived 10% within a few hours recently).
Citigroup suggests the falls were initially a reflection of the growing concerns over the outlook for inflation and interest rates globally as well as the correction in commodity markets, but quickly turned into weakness brought on by the failure of investors to meet margin calls.
The broker suggests the market may yet have further to fall, as global indicators of the appetite for investors to take on more risk have turned down. This it suggests could result in more selling from momentum-style investors. Overseas investors now less confident about the global outlook could also withdraw some funds, the broker estimating as much as US$3.5bn has been invested by international investors in the year to date compared to US$10.7bn last year.
In its view it remains too early for bargain hunters to re-enter the market, as the broker’s estimate for fair value for the index is around 8,500, about 15% below current levels of around 10,000. In contrast, JP Morgan considers fair value on the Sensex to be around 11,000.
While further potential selling is possible, a collapse in the market is unlikely in Citigroup’s view thanks to the underlying strength of the economy and the fact local institutions have some cash with which to support the market.
The broker has not changed its economic growth forecast for the country in the 2007 financial year of about 7.6%, which is close to the 8% achieved in the four months to the end of April but down slightly from last year’s 8.4%.
The OECD is a little less bullish and is forecasting growth for FY07 of 7% as it takes the view there will be a slowdown thanks to tighter monetary and fiscal policies.
The Asian Development Bank’s (ADB) outlook is similar, forecasting 7.5-8% growth, but with oil prices the main risk. As the ADB points out, government controlled oil prices have not risen yet this year despite a 20% increase in the oil price, so when an adjustment is made it is likely to be accompanied by tighter monetary policy.
Citigroup agrees the oil price is a risk to growth, as are the political environment and the possibility of coal shortages.
On a more positive note the broker suggests both Fitch Ratings Agency and Standard & Poors may lift their ratings on the economy in the coming year given substantial progress has been made in improving the balance of payments position.
Citigroup suggests investors should continue to adopt a defensive strategy by focusing on large cap stocks with what it classes as visible growth strategies and high dividend yields. The broker suggests being overweight banks, capital goods, energy, IT services and utilities stocks.
