In yet another sign that the economy is getting better, the year-on-year (y-o-y) rate of growth in bank credit has edged up for the first time this fiscal, apart from the very marginal improvement in the data for 19 June. Reserve Bank of India data shows that, as on 3 July, the y-o-y growth in bank credit was 16.3%. As the accompanying chart shows, the y-o-y rate of growth of bank credit had been falling continuously, from 18.8% on 10 April to 15.1% on 26 June. The rise as on 3 July could be the first sign that credit growth has reached a turning point, although, of course, one fortnight’s data do not make a trend.
But the y-o-y numbers conceal a lot of things, such as the much higher borrowings of oil companies last year. A month-on-month (m-o-m) comparison is more revealing. Between 10 April and 8 May, bank credit contracted by Rs19,385 crore, while it went up by Rs15,292 crore during the same period last year. Between 8 May and 5 June, bank credit increased by a mere Rs5,154 crore, while it went up by Rs35,243 crore last year during the same period. But between 5 June and 3 July, the increase in credit of Rs41,537 crore was much more than the rise in credit of Rs22,255 over the corresponding period of last year. If sustained, this could mark the beginning of higher credit off-take.
Nomura Research economist Sonal Varma has seasonally adjusted the credit numbers to offset the base effects. She finds that credit growth rose to a 1.2% m-o-m seasonally adjusted rate in June, much better than the 0.3% seasonally adjusted m-o-m rate in January. In a recent research note, she wrote, very significantly, “data for the fortnight ending 3 July suggest that the monthly run rate may be nearing pre-crisis levels.” Before the crisis, the m-o-m seasonally adjusted growth in credit was on an average 2%.
Merrill survey warns of risk in emerging markets
The Merrill Lynch Fund Manager Survey for July finds that a net 54% of asset allocators are overweight (or more heavily invested) in emerging market equities, the second highest on record. A note by Bank of America Merrill Lynch says that such a high reading adds risk to emerging market equities and that “such extreme positioning has typically been followed by a period of relative underperformance”.
That’s because such a high reading means there are fewer investors left to turn bullish on emerging markets. The May survey had warned that allocation to emerging market equities had “climbed back to bubble-like levels” when a net 46% of investors were overweight emerging markets.
The survey also says that a net 59% of emerging market investors expect earnings to grow at least 10% over the next year, which is the most confident earnings outlook since January 2008. This makes emerging markets vulnerable to earnings disappointment.
At the same time, the downside is cushioned by the cautious stance that investors have on equities, with only 7% of global asset allocators overweight equities. They have trimmed that down from 9% in June but it’s still far below the net 60% of investors overweight global equities at various times during the last bull run. But investors have been scaling up their allocation to emerging markets while curtailing investments in the US and Europe, prompting Michael Hartnett, Banc of America Securities-Merrill Lynch chief global equities strategist, to comment that, “Decoupling is having a sequel. Investors are very overweight emerging market equities while at the same time underweight every other equity region”.
The y-o-y rate of growth of bank credit had been falling continuously, from 18.8% on 10 April to 15.1% on 26 June
Investors are now underweight US as well as euro zone equities.
Merrill Lynch’s Risk Appetite indicator fell to 36 in July from 38 in the previous month, which is reflected by the recent sell-off in the stock markets. The sell-off is also seen from the sharp rise in average cash positions at the global level to 4.7% in July from 4.2% last month.
Indonesia is now the most popular market for global emerging market (GEM) investors, with a net 37% overweight the country. China follows in second place, followed by Russia, Brazil and Turkey. Investors have trimmed positions in China, since a net 80% of them were overweight China in May.
GEM investors are slightly underweight on India, down from a net overweight position in May and June. Before the election, investors were a net 9% overweight India. The shift in stance is reflected in the selling by foreign investors in the Indian market.
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