India holds out amid global rout
Domestic equities are down 5.4% in dollar terms, even as the developed world pack slid over 7% this month
For years, Indian equities have marched in lockstep with global equities. During the Lehman Brothers collapse a decade ago, domestic benchmark indices slumped in sync with global indices. And, when a stimulus package was announced in the US in 2009, Indian indices rallied along with their global counterparts.
Last week’s fall, too, was in line with global equities. However, the extent of the slide was unexpected. “While we are not quite delinked, India will be much less affected by what happens to US interest rates,” said U R Bhat, managing director, Dalton Capital Advisors (India). “Our exports basket is well diversified and unlike some of the other emerging markets, such as Taiwan, Thailand, and China, we are not as dependent on US borrowings,” he added.
The US indices have slid 2 per cent, year-to-date, on inflation threats and concerns that the US Federal Reserve will move aggressively to raise interest rates. The UK’s FTSE, Germany’s DAX and France’s CAC have slid 4.4 per cent, 2.8 per cent and 1.1 per cent, respectively. On the other hand, the Nifty and Sensex are more or less unchanged, both in dollar and local currency terms.
Emerging markets that depend on commodity exports have also been largely insulated from the global rout. The sliding dollar and hopes of a further boost to the global economy have driven commodity prices higher. Brazil’s Ibovespa is up over 5 per cent, year-todate. Thailand and Indonesia are up 5.5 per cent and 2.3 per cent, respectively. Even on a month-to-date basis, Indian markets are down 5.4 per cent in dollar terms, while the developed world pack has come off by over 7 per cent.
According to Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies, domestic flows are more resilient now than in 2008. “Domestic flows have been robust; that is what has kept the markets from going into free fall,” he said.
Foreign portfolio investors (FPIs) have historically been dominant in Indian equities, given their size and trading patterns. But that has changed in the past couple of years, with domestic institutional investors (DIIs), particularly mutual funds (MFs), stepping up purchases and providing the muchneeded support to the markets. The financialisation of savings, triggered by demonetisation, has also supported this trend. The rise in the share of domestic investors reduces dependence on the more volatile foreign inflow.
In the last two calendar years, equity schemes have seen monthly inflows of ~40-60 billion via systematic investment plans (SIPs). MFs have pumped ~1.6 trillion into Indian equities over the period, more than twice of what the FPIs put in, at ~714 billion.
Despite the slip-up on the fiscal front, India is on a better wicket than most other emerging markets. “Most of the EMs are grappling with political or currency issues, or have lost growth momentum. Our political environment remains stable, and our currency and fiscal positions are in reasonably good shape,” said Bhat.
There is likely to be an improvement in earnings growth with the effects of demonetisation and the goods and services tax (GST) fading away. “We expect FY19 earnings to benefit from an underlying consumption recovery, a low base of FY18 and impending resolution of NPAs (nonperforming assets) via the insolvency and NCLT (National Company Law Tribunal) mechanism. To that extent, the gradual pick-up in high-frequency