Mumbai: The trickle of analysts and market watchers predicting a quick turnaround in India is fast becoming a flood, with some forecasting a recovery as early as June.
In the past five days, Swiss bank UBS AG, Barclays Capital and Macquarie Bank Ltd have said the local economy can only get better from now, and that they are looking at a mid-year recovery, in sharp contrast to the Reserve Bank of India’s observation in its macroeconomic review last week that the worst is not over yet.
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RBI’s industrial outlook survey of private sector manufacturing firms indicates that business expectation indices for January-March declined sharply by 20.7% over the previous quarters, and by 13.9% for April-June.
A survey of professional forecasters by RBI predicts gross domestic product, or GDP, growth of 5.7% in 2009-10, down from an earlier forecast of 6%.
The foreign brokerages, however, point to an improvement in lead indicators such as monetary policy, foreign exchange reserves, foreign fund inflows, inventories and money supply. Lead indicators are early signs of changes in economic activity as opposed to industrial production or consumption, which coincide with the economic cycle.
UBS, for instance, says in its 24 April report that its lead indicator index has gone up for three consecutive months, from -2.08 in December to 2.1 in March. This “signals a strong likelihood of an upturn in industrial activity by June-09”, UBS analyst Philip Wyatt wrote in his report.
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“The slump in emerging Asia is over,” Barclays Capital, the investment banking division of UK’s Barclays Bank Plc., said in its report on 27 April.
Its analysts have raised their forecast on India’s GDP growth to 5.5% from 4% earlier, and expect the country’s economy to start recovering from the second half of this calendar year.
Macquarie agrees. “Our view remains that the largely domestically driven Indian economy will begin to recover palpably from mid-year onwards. The double-cylinder fiscal and monetary response has been aggressive and already paying dividend,” the brokerage said in its 24 April report.
Starting December, India’s government announced three fiscal stimulus packages constituting key tax cuts and spending on infrastructure to the tune of 3% of GDP, or Rs1.6 trillion.
To be sure, the analysts have tempered their optimism with caveats such as the outcome of the ongoing general election to Parliament and results for the fourth quarter ended 31 March.
“Political uncertainty over the outcome for the ongoing general elections remains a legitimate concern,” said Macquarie.
A new government should be in place by the end of May, but political observers are worried that a fractured mandate could lead to the formation of a government without much power or stability.
As for corporate earnings, eight firms whose stocks are part of the Bombay Stock Exchange’s benchmark Sensex index, have so far reported aggregate earnings growth of 7% over the year-ago period, according to investment bank Morgan Stanley.
In a 24 April report, before India’s largest private bank by assets ICICI Bank Ltd posted a 35% decline in profits, it said the earnings were slightly better than its 6% growth expecations.
However, revenue for the 156 companies that had reported results for the fourth quarter till then was down 1% over a year ago and profit had climbed 2%, it added.
Still, key indicators such as inventory, credit growth and manufacturing have either stabilized or shown an improvement over the past few months.
“Although the overall finished goods inventory will remain above normal, more firms that have completed de-stocking are likely to start re-stocking by 2Q 09 (the April-June quarter),” Nomura Financial Advisory and Securities India Pte Ltd said in a 9 April report.
This is already happening in sectors such as automobiles. In March, total automobile production exceeded total sales for the first time in seven months, indicating that vehicle makers have finished de-stocking or selling their inventory.
The ABN Amro Purchasing Manager’s index too stabilized after shrinking for four straight months. The index stood at 49.5 in March, a tad below the 50 mark, which denotes that manufacturing activity neither expanded not contracted as compared to the previous month.
Credit growth too has improved and is expected to get better as RBI’s rate cuts kick in.
“We expect an easing of funds due to significant monetary steps taken by the RBI to infuse liquidity, and interest rates on their way down,” Goldman Sachs Group Inc., which expects India’s economy to start recovering in the second half of this financial year, or from October, said in a report on Monday. “Corporate bond spreads have gone back to pre-crisis levels and lower policy rates have translated into lower lending and deposit rates.”
For instance, non-food credit growth in March 2009 was 97.3% of the growth in March 2008.
The comparable figure in February was 69.8%. In January, non-food credit disbursals contracted.
Bond spreads on emerging markets have also improved. For instance, the JPMorgan EMBI+ index, which measures the spreads over the US treasury, has fallen to 568 basis points from nearly 700 basis points spreads at the start of the year.
A lower spread indicates that investors less yield to own emerging market securities over relatively risk free US treasury bonds.
All these have revived interest in funds in India. Many financial institutions have shifted India to “overweight” from “underweight”. Investment gurus such as Mark Mobius of Templeton and Anthony Bolton of Fidelity, the world’s largest asset management company, have called the recent climb of Sensex a bull run, earlier this month.
The Bombay Stock Exchange’s 30-stock index has climbed 34.82% since 9 March to 11,000 levels, and 14.04% since January, after declining 52.45% in 2008. On Tuesday, the index fell some 3%, or 370 points, to close at 11,001.75.
A mid-April survey of emerging market fund managers by Bank of America-Merrill Lynch says there has been a “rotation toward markets sensitive to currency, rates and risk such as India ... in April.”
Fund managers are also putting their money where their mouth is. Foreign institutional investors, or FIIs, the largest category of investors in domestic markets, have bought $1.849 billion (Rs9,560 crore) worth of Indian stocks thus far this year. They had sold some $13 billion worth of local equities in 2008.
Overall, emerging market equity funds saw inflows for seven straight weeks till the end of the week ended 22 April, according to fund tracker EPFR Global.
Macquarie says industries such as automobiles, cement and steel are already showing signs of increased activity.
“Though India’s structurally broad industrial base suggests that IP (industrial production) will need a bit more time for the YoY (year-on-year) growth rates to be firmly in the black, and rising. But we are gradually getting there,” the Australian bank said in its report. Data released by the Central Statistical Organization shows that factory output shrank 1.2% in February on weak global and domestic demand. This is against a 9.5% growth rate during the same month a year ago.
Graphics by Sandeep Bhatnagar / Mint