Bull market correction seen as opportunity

hares in India buckled under heavy foreign selling as worries grew about the darkened clouds over the country’s economy, but domestic fund managers wallowing in an ocean of cash are hardly perturbed and say the correction in a bull market is an opportunity to accumulate stocks for the longer term.

A sharp drop in the pace of economic growth and rising oil prices have triggered concerns New Delhi would unfold a stimulus package at the expense of holding the line on fiscal discipline. Many economists, specifically those attached to foreign banks, funds and brokerages, abhor at the thought of loosening the hard-fought leash on fiscal deficit — budgeted at 3.2 per cent of GDP for financial year 2017-18 ending next March.

Any deviation from the deficit target, the argument goes, could spell deeper trouble in the years ahead. Inflation, for instance, could accelerate as excessive liquidity is pumped into the system and the central bank would come under pressure to tighten policy, pushing up the cost of funds for industry. The government’s debt profile would also take a hit.

Foreign funds dumped shares worth more than $1.1 billion (Dh4 billion) in September, pushing the top-30 Sensex down 1.4 per cent to 31,283.72. It was the second consecutive month of outflows after August saw sales of about $2 billion. The 50-share Nifty shed 1.3 per cent in September to 9,788.60. “The market is facing heavy turbulence due to distressing economic indicators, but the point to note is the resilience,” said equity strategist V. Venugopal. On Thursday, the government said it would abide by its full-year borrowing target for 2017-18 and sell bonds worth Rs2.08 trillion between October and March. Finance Minister Arun Jaitley had budgeted to raise Rs5.8 trillion through bond sales to bridge the fiscal deficit of 3.2 per cent of GDP.

For all the oft repeated near-term ills caused by the abrupt demonetisation last November and the launch of a national sales tax, both without much preparation, there is consensus that India’s macro fundamentals remain robust.

Foreign exchange reserves of more than $400 billion and retail inflation well below the central bank’s threshold of four per cent as well as current account and fiscal deficits show no reason to panic. On the contrary, they indicate a picture of reasonably good health. GDP growth weakened to a more than three-year low of 5.7 per cent in the June quarter, and would have remained under pressure in July-September.

But when the new Goods and Services Tax (GST) overcomes the initial hassles, it would bring in the unorganised sector into the tax net. This would increase government revenue by bounds without raising taxes. The GST, which replaced multitude levies and state barriers to trade and services, would considerably boost economic activity.

Wavering stock market

Flows into domestic funds are estimated to have climbed by 2-3 per cent in September, showing an 18th consecutive month of inflows, despite the wavering stock market. Total assets under management with funds in August stood at a record Rs20.6 trillion.

“I don’t think the structural nature of these flows will change, though there will be cyclical ups and downs.” Ridham Desai, managing director at Morgan Stanley India, told a news conference.

Total financial savings are low at nine per cent of GDP, compared with a peak of 14.5 per cent about eight years ago, and the government’s push for pension funds to invest in equities, diminishing appetite for gold, property and fixed income should drive flows even higher.

“The party has just begun,” he said, playing down talk that stocks were expensive.

Morgan Stanley expects earnings of Sensex constituents will rise 11 per cent in 2017-18, and 19 per cent in the following year. It sees the economy growing at an average 7.1 per cent annually in the next decade.

Mahesh Nandurkar, India strategist at brokerage CLSA, believes that foreign portfolio investors would return only when corporate earnings pick up, which should likely be in the December quarter. Until that happens he expects the market to consolidate. “But I don’t see any reason to panic and I would classify this as the ‘buy on dips’ market,” he told BloombergQuint.