Michael Kurtz, Head of Strategy (Asia), Macquarie Securities Group, does not think the Union Budget would be critical for FII inflows. In an interview with Krishna Merchant, he says other important events to occur in the next 12 months would have more implications. Edited excerpts:
Do you feel that the Indian markets are attractive at the current levels?
India has got cheaper than it was at the end of 2010 and compared to India’s long-term average. But, rest of Asia has also got cheaper, the selloff in the region has perhaps not been indiscriminate. It has affected all the markets in varying degrees.
Regional investors who look at India as just one of the many alternatives may not be convinced by the pullback in India that this is a market they need to be into. Perhaps because consensus earnings forecast for India is as high as in 2010 and anticipates an excess of 20 per cent earnings growth in this full year. Therefore, there is only limited upside for earnings revision to come.
Beyond these, there are larger macro risks that have kept investors a bit more intimidated by the Indian markets. And, not the least is India’s disproportionately large vulnerability to the rise in oil prices, and the political impasse over the telecom scandal.
Till we pass these risks, investors will probably remain on the back foot when it comes to Indian equity space.
What are the downside risks to earnings growth going forward?
Downgrades are already under way. There are concerns among investors that Indian companies are facing margin pressures from the rise in basic material and key input prices.
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There are some effects that are now getting priced in from delayed response of monetary tightening over the past year, which is beginning to have a visible impact on the final demand.
As a result, we have seen revision cycle for Indian stocks turn mildly negative, it is by no means a catastrophe for earnings forecast. But, none the less at the margin, numbers are downgraded than upgraded.
How high is the probability that the developed markets will outperform emerging markets?
If crude oil prices are going up because US demand is beginning to recover, it may become a problem for India as India is a low-export-to--GDP economy.
Having said that, there are other economies in Asia that are directly tied in to US demand and they may be negatively affected by rise in crude oil prices. But because they get more of a direct pick-up from exports to US, the factors can sell out or add up net in favour of those economies like Korea and Taiwan.
We should also recognise that India’s inflation is still in large in function to vast levels of robust growth that India is able to engineer in recent years.
As long as the growth is still chugging along at 8 per cent (give or take 0.5 per cent), we do not have to think this as a catastrophe for Indian demand growth or business cycle. It simply means that, at the margin, some of these developments are not working unidirectionally in India’s favour.
Will the foreign institutional investors (FIIs) look at the Union Budget to put money back in India?
I don’t think the Union Budget is going to be critical for FII inflows. There more important events to occur, such as the monetary policy, in the next 12 months. On political front, how the policies evolve before and after state elections need to be watched. I do not expect wide outcome from this Budget.
Do you expect growth to slow down in China and hence demand for commodities getting dampened?
If China achieves what it is aiming, it is not going to be slowing growth as merely capping the upside in growth.
In other words, if China is not tightening policy, it is likely that growth would accelerate and inflation would also accelerate and this would lead to substantial acceleration in nominal GDP growth.
We do not have at this point any downgrades to Chinese GDP forecast in the offing; we still see Chinese growth coming to around 8.5 per cent in 2011.