Two-thirds of major Asian markets, including India have a financial vulnerability, which is close to what was observed in mid-1997, Bank of America Merrill Lynch said in a research note today.
According to the global financial services major, in terms of the average magnitude of financial vulnerability for nine major Asian countries, we are getting close to what was observed in mid-1997.
"Singapore, India and Malaysia score poorly on our measure of financial vulnerability. China, Hong Kong and Indonesia are also concerning. Korea and Taiwan look less vulnerable, while Thailand is in the middle," BofA-ML said in the research note.
With regards to India, it said financial vulnerability is particularly high.
"While the lending boom of 2002-07 is over, the consequences in terms of bad loans are only now showing up. Meanwhile, the current account deficit and fiscal deficit have widened sharply, and the money multiplier and international claims/GDP have increased substantially since 2000," it said.
In order to tackle the "wide breadth" of trouble in India, resolute policy action is needed.
In the past, when financial vulnerability was this high, and broad 1991 the government headed by Prime Minister Narasimha Rao, and Finance Minister Manmohan Singh, unleashed significant reforms.
"With an election looming, we see that route as challenging," the report said.
"On our valuation models looking at P/B versus ROE less COE, we estimate India could fall another 10-15% before becoming deep value that is seen in financial crises," the report said adding that "we are watching the sell-off of previously favored stocks when these names are sold off aggressively, we believe most of the selling would be done."
The report further noted that "we remain neutral valuations are getting better (clearly), and there is a small probability of policy action, which could lead to whipsaw gains".
