Ghost of 2008 haunts Street as bears party

Investors Jittery As Macro Situation Threatens To Go Out Of Control

THE two-year investor ecstasy over India's macroeconomic growth is slowly giving way to agonising cries over inflation and interest rates, reviving memories of the 2008 savage collapse in equities that wiped out many investors.
    As the noise on soaring cost of funds and increasing commodity and crude oil prices gets louder, analysts are preparing to cut corporate earnings estimates for the first time in nearly two years. This could pressure stock prices that are already at a premium to emerging market peers.
    Two years of excesses with stimulus, topped with nature's fury—one year of the worst drought in three decades, the next of unseasonal rains—are triggering concerns among investors that macroeconomic health may deteriorate.
    Foreign investments in India are poised to slow from the record $29 billion in 2009 as overseas investors prepare to benefit from safer developed markets, with demand reviving in the US, including corporate action in the form of takeovers.
    "The current situation looks similar to that in 2008, when inflation had to be contained by raising interest rates," said V Anantha Nageswaran of Bank Julius Baer. "This risk is real and we suspect the repeat of a similar situation."
    Indian benchmarks have underperformed major developed and emerging markets since the macro situation turned shaky in the past few months. Suddenly, investors are worried about soaring prices that could force a reluctant Reserve Bank of India to resume raising rates. The currency looks wobbly as imports far outstrip exports, threatening to take the current account deficit ratio to 1991 crisis levels, a contrast to China's. Fiscal deficit, forecast at 5.5% in 2010-11, may not come under control next year as the Centre is tempted to spend more on welfare schemes with an eye on state elections. And, with about two months to go, the privatisation target of 40,000 crore remains just half achieved.
    "Macro concerns regarding inflation, fiscal and current account deficits, and potential earnings disappointments could lead to significant multiple compression from the current levels, which we see as elevated," Parul Saini of Royal Bank of Scotland says.
    Sensex is down 5.7% since November when the US' S&P 500 rose 7.2% and the MSCI world index gained 4.3%. The MSCI Emerging Markets is up 1.4%. India remains the most expensive among Bric nations, a moniker for the uniquely fastgrowing Brazil, Russia, China and India. Emerging markets stand to lose
WHILE India is trading at 22 times companies' forecast earnings, Brazil and Russia are at 14.1 times and China at 17.9, which may lead to global investors choosing rivals over India.
    Signs of revival in the US economy and higher returns in developed nations could divert funds away from India. Foreign funds have sold Rs 1,152 crore worth of Indian shares this year. They may lower their investments in emerging markets as a whole.
    `For the last two months, what we have seen is that some of these longer dated investors, who have found themselves to be overweight in the developing markets simply because they let it go higher and higher, will put less and less money," said Abby Joseph Cohen, Managing Director and Senior Investment Strategist at Goldman Sachs. ``It doesn't mean they'll withdraw but it is just that they'll put lesser money as they see opportunities in the developed markets. The slowdown in overseas fund flows, with bearish outlook for corporate earnings due to input costs eating into profits, may make India underperform for a few quarters.
    Analysts predict headline inflation, or wholesale price inflation, to touch 7% by March 2011 because of higher food prices. This is significantly above RBI's target of 5.5%, and also above the finance minister's recent expectation of 6.5%. Current commodity prices (as measured by the CRB Metals Index, a barometer for base metal price movement) are up 45% this year than last years' levels while interest rates (as measured by three-month CP rates) are 88% higher.
    "We could see some earnings downgrades this year as higher costs lead to margin pressure," said Jyotivardhan Jaipuria, MD and head of India research at DSP Merrill Lynch. "It will be a year of very low returns in markets which will largely be rangebound. India is facing a problem of inflation, which will lead to higher interest rates. So near-term lower industrial production may also worry the market."
    Maruti Suzuki, Samsung, Tata Steel and Sterlite Industries have all raised prices to partly protect their margins due to a jump in their product prices. That is spreading in the system that could change the demand outlook. Food prices are jumping with essentials such as onions and garlic at multi-year highs on supply shortfall.
    "We expect lower earnings growth for fiscal 2012 and 2013 primarily due to less optimistic assumptions on margin expansion," wrote RBS' Saini.
    (With inputs from Nishanth Vasudevan)