Third round of US quantitative easing unlikely; domestic political and economic factors will drive Indian shares.
The end of the US Federal Reserve’s $600-billion bond-buying programme, known as quantitative easing 2 (QE2), at the end of this month is unlikely to bring succour to the Indian stock market.
Foreign fund managers and strategists are of the view that another round of bond-purchasing from the Fed, or QE3, is not likely and the Indian market will continue to be driven by domestic factors post-QE2.
| SENSEX LAGS AS COMMODITIES SURGE | |||
| Name | Nov 11, ’10 | Jun 13, ’11 | % chg |
| Brent crude ($/bbl) | 88.47 | 119.57 | 35.15 |
| Silver ($/oz) | 27.69 | 35.79 | 29.27 |
| ThomReuters/Jefferies Commodity Index | 314.85 | 347.46 | 10.36 |
| Gold ($/oz) | 1,408.65 | 1,528.25 | 8.49 |
| Dow Jones (Jun 10) | 11,283.10 | 11,951.91 | 5.93 |
| FTSE 100 (18.30 IST) | 5,815.23 | 5,790.64 | -0.42 |
| Nikkei 225 | 9,861.46 | 9,448.21 | -4.19 |
| Hang Seng | 24,700.30 | 22,508.08 | -8.88 |
| Sensex | 20,589.09 | 18,266.03 | -11.28 |
| Shanghai Se Comp | 3,147.74 | 2,700.38 | -14.21 |
| Compiled by BS Research Bureau Source: Bloomberg | |||
“In our base case scenario, we are not expecting any QE3. Interest rates in the US are going to remain low and I don’t think we need QE3,” said Sam Mahtani, director - emerging market equities at F&C Asset Management in London. “The end of QE2 is not going to have any major impact on Indian shares. The key driver for the Indian stock market will be inflation and the interest rate cycle coming off from their peaks. Inflation in India should peak out in September-October, which should help the equities market,” he added.
Factors such as high inflation, rising interest rates, corporate governance and an earnings slowdown have plagued Indian shares so far this year. Higher commodity prices during the QE2 period have also reduced the lure of the country’s shares for investors.
For example, crude oil prices have risen about 35 per cent since the start of QE2. High crude oil prices have fuelled inflation in India, which imports more than 75 per cent of its requirement, and increased the government’s subsidy burden.
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Since the start of QE2 in November 12 last year, the Bombay Stock Exchange (BSE) benchmark Sensex has lost over 11 per cent, underperforming most global peers. During the same period, the Thomson Reuters-Jefferies CRB Index, which tracks the prices of 19 commodities from crude oil to copper, has gained about more than 10 per cent. (See chart)
“The end of QE 2 will not directly impact India. It will continue to be largely driven by the domestic political and economic dynamics,” said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co in Singapore, who doesn’t expect the Fed to announce QE3 after June 30.
To curb soaring inflation, the Reserve Bank of India (RBI) has raised key policy rates nine times since April 1, 2010. Most market participants have factored in a 25 basis points increase in key policy rates on Thursday, when the central bank will announce its mid-quarter review of the monetary policy.
“The impending ending of QE2 is probably just one of many factors contributing to the current weakness and volatility in global shares and this has simply accentuated the weakness in Indian shares, which have had their own pressure from the RBI’s monetary tightening.
The ending of QE2 should already be factored in, but it could still cause more nervousness over the month ahead,” said Shane Oliver, the Sydney-based head of investment strategy at AMP Capital Investors, which manages about $98 billion.
“At this stage, it is unlikely the Fed will immediately announce QE3 simply because right now it regards the slowdown in US growth as largely temporary. The economic data would have to get a lot worse before the Fed moves on QE3,” he added.