Global slowdown woes return

The weak economic recovery in the US, Europe could impede growth in emerging markets, with exports and FII flows being hit the hardest.

Worries due to another global slowdown saw the Indian indices fall over one per cent on Friday. Investors are concerned that the 1.6 per cent GDP growth in the US for the June quarter – revised from an earlier estimate of 2.4 per cent – could worsen further

The US markets may have jumped on Friday after the US Fed promised to act if the recovery were to falter, but economists and money managers are divided on the chances of a US recovery. Some, like economist and professor Nouriel Roubini, believe chances of a double-dip recession in the US have increased to 40 per cent, while others stress the chances are even lower.

For the Indian investor, though, bad news on the global front will have an impact in two ways. Since Indian markets are highly influenced by foreign institutional investor (FII) flows, any adverse change in their sentiments could bring the markets lower. Secondly, many Indian companies – including Reliance Industries, Tata Steel, Hindalco, Tata Motors and IT majors – have a relatively high global exposure.

These companies collectively account for 34 per cent weightage in the BSE Sensex. Hence, any weakening of global economies could have implications for their consolidated earnings.

We spoke to a host of experts on the recent global developments, the market’s outlook and investment strategies. Read on to know more.

Falling inflows
The repercussion of a slow US and European economic recovery and soft Chinese growth has seen international investors pulling out money from equities and opting for bonds and gold. According to data from research firm EPFR, while fund flows into emerging markets at $322 million hit a 13-week low for the week ended August 25, investors parked over $7 billion in bonds and gold instruments in the same period. Dr Arun Singh, senior economist, Dun & Bradstreet India, believes net FII inflows to India can be expected to remain strong in 2010-11 compared to the crisis period, but they are not expected to touch the pre-crisis level given the slow pace of recovery in major global economies. Also, while there could be blips in the interim, experts believe that a trend reversal in unlikely.

Weakening exports
In a recent report, Edelweiss Securities says the global bearish trends considerably influence domestic business sentiments, capital inflows and trade in goods and services, thereby influencing aggregate demand in the domestic economy. However, given the relatively lower dependence on exports, India remains more insulated to a global slowdown than most peers.

Says Abhay Bhalerao, director, Equirus Capital: “It may be a little premature to read into the current set of data as there are mixed signals — a reduction in commodity and oil prices is a positive for India but the export sector is likely to face fresh headwinds.”

India’s exports, which contribute about a fifth to the nation’s GDP, saw double-digit growth in November 2009 after being lacklustre for a major part of the year. However, the pace of growth in the sector is at 13.2 per cent in July – the slowest growth in the last six months – reflecting the base effect and the demand contraction in Europe (India’s largest trading partner with a 20 per cent share) and the United States (11 per cent).

Domestic boost
So, exports are likely to be sluggish. But analysts are confident about the growth in domestic consumption, despite the recent slowdown in industrial production. Dharmakirti Joshi, chief economist, Crisil, believes India’s export-driven sectors like textiles, gems and jewellery will remain weak, but sectors fired by domestic demand like automobiles, steel, telecom and durables will remain strong.

Says Dun & Bradstreet India’s Singh: “GDP is expected to grow 8.5 per cent in 2010-11, given the strong recovery in industrial activity, prospects of a better agriculture production in anticipation of normal monsoon during this season as well as the resilient performance of the services sector.”

This should help corporate earnings grow at an average of over 15 per cent in the medium term.

What should you do?
There is no doubt that a bottom-up approach will work better as, within sectors too, individual stocks could give divergent returns. For instance, while Bajaj Auto jumped by 50 per cent, Hero Honda gave only nine per cent returns from January till now. Similarly, while Lupin gained 21 per cent, both Cipla and Ranbaxy declined 10 per cent and 14 per cent, respectively. Echoing this, Bhalerao says investors should take a bottom-up approach within auto, domestic consumption and infrastructure themes.

“The best insurance at all times are great managements. Apart from quarterly numbers, investors should buy into the company’s strategy,” he believes.

While the banking space is also likely to do well, investors should avoid companies with high global sales, have high debt on their books or those which are yet to tie up a large part of their funding needs to sustain expansion plans and growth rates.

Among top picks that analysts recommend include Asian Paints, Corporation Bank, GAIL India, GVK Power, ICICI Bank, ITC, L&T, M&M, Pantaloon and Tata Power.