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Is India's stock market faltering?
Commentary: Some skeptics say larger correction could be on the cards.
By Shikhar Balwani
MUMBAI (MarketWatch) -- While the rain gods continue to smile on the country's financial capital Mumbai, the recent slide in Indian shares has unnerved many investors, with some skeptics saying that a much larger correction could be on the cards.
Despite a slightly disappointing first-quarter earnings performance by India Inc. amidst tepid global markets, Indian equities have hitherto held their own, thanks to strong domestic growth indicators and good monsoons, which are crucial for the South Asian nation's economy as about 60% of its farmland is rain-fed.
The Bombay Stock Exchange's benchmark 30-stock Sensex /quotes/comstock/28p!sensex (XX:SENSEX 17,918, -114.30, -0.63%) has continued to outshine its BRIC peers as well as Japan's Nikkei 225 Index /quotes/comstock/11b!i:ni225 (JP:NI225 8,876, -273.44, -2.99%) and Hong Kong's Hang Seng Index /quotes/comstock/08s!i:hsi (HK:HSI 20,553, -184.46, -0.89%) in 2010.
However, last week the blue-chip index posted its biggest weekly drop in 14 weeks, with market watchers attributing the slide largely to concerns surrounding the health of the U.S. economy. Closing a feather below the psychologically important 18,000-mark Friday, the Sensex has now slipped 2.6% since hitting a 30-month high of 18,475.27 on August 19.
"The markets had to crack at some point because it's not possible to be decoupled from the international markets," said Ambareesh Baliga, vice president of Mumbai-based Karvy Stock Broking.
Like in 2009, when the Sensex rallied a whopping 81%, the market's advance this year too has been driven by foreign institutional investors.
FIIs, who pumped in a net $17.46 billion into the Indian stock market in 2009, have bought Indian stocks worth a net $12.89 billion so far in 2010 (including primary issues), according to data from the Securities and Exchange Board of India. The Sensex is up 3.1% so far this year.
Baliga, however, added that "with the sort of scenario emerging globally, and lately more in the U.S., there is no way foreign institutional investors can continue putting money in emerging markets."
The week and month ahead
While encouraging comments from Federal Reserve Chairman Ben Bernanke Friday could soothe some nerves when trade begins this week in India, many experts are wary about whether these potential gains would sustain, given the lack of triggers in the first-half of September.
"There could be some weakness as (domestic) news-flow is likely to be muted till the time the corporate advance tax numbers for the second fiscal quarter start rolling out mid-September," said independent investment adviser S.P. Tulsian. However, he tips strong support for the Sensex around 17,000.
That said, news flowing out of U.S. could have a strong influence on the markets. September has historically been a challenging month for U.S. stocks and the days ahead will bring plenty of key economic releases, including July income and personal consumption figures, reports on manufacturing activity and employment during August.
At the same time, financials, which carry the highest sector weighting (24.72%) on the Sensex, could be pressured ahead of the Reserve Bank of India's rate-setting meeting on Sept. 16, where the central bank is widely expected to carry on with its monetary tightening measures. The 14-stock BSE Bankex underperformed the Sensex last week, shedding 2.5% to break a seven-week winning streak.
Yet there are some who believe Indian markets could continue to outperform.
"Given the stronger domestic growth outlook (for India) and the probability of monetary exit being delayed by the advanced economies, capital inflows could be expected to accelerate," Khandwala Securities wrote in a note issued Saturday.
The Central Statistical Organisation will release official gross domestic product data for the April-June quarter at 0530 GMT (01:30 a.m. U.S. Eastern Time) Tuesday, which could serve as a testimony to this optimism. According to a Dow Jones Newswires poll of 19 economists, the world's second-fastest growing major economy expanded 8.9% from a year earlier during the quarter ended June.
The projected growth rate, which is greater than the 8.6% expansion in the January-March quarter, will be the fastest pace in more than two years.
"I think the world is now accepting that the India story is going to play for a long time. [Foreign] money is not coming on a quarter-to-quarter basis. There has been a constant flow of capital into Indian equities," Samir Arora of hedge fund Helios Capital Management said recently while speaking from Singapore.
Arora, in fact, said that "the uncertainty surrounding global markets is good for India," making this market look relatively attractive.
On the same lines, Macquarie Equities Research wrote in a note last week that "global environment still remains uncertain and we believe that funds flow into India will remain strong," adding that its one-year forward Sensex target stands at 19,500.
Investors will thus be hoping that foreign funds, which were net sellers in three of the five sessions last week, prove the selling to be just an aberration.
Is India's stock market faltering? Shikhar Balwani's This Week in India - MarketWatch
